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December 17, 2013

Putting Up with Poachers

A new study suggests that sometimes it may be best for large companies to allow competitors to free ride on sponsored search ads.


During the 2011 Super Bowl, Skechers promoted its Shape-ups model of muscle-toning sneakers in a famous television ad featuring Kim Kardashian. As a way to increase consumer awareness of its product, the ad paid off: in the days immediately following the Super Bowl, the search volume for both “Skechers” and “Shape-ups” spiked on Google, more than doubling in the case of the brand name.

Rather than invest in an expensive TV spot, one of Skechers’ competitors, Reebok, took a different approach: buying online ads tied to the “Shape-ups” keyword. When potential customers searched for “Shape-ups” on Google, sponsored ad results for Reebok’s EasyTone shoes appeared in the right column of the results page. By purchasing ads linked to Shape-ups, Reebok was attempting to poach Skechers’ customers.

Reebok is hardly an outlier in keyword poaching. Online advertising is the fastest growing ad medium and is likely to account for more than 30 percent of total US ad spending by 2015, according to eMarketer, a digital marketing firm. And while traditional media such as TV, radio, newspapers, and billboards are intended to create awareness of a product, sponsored search ads reach consumers when they are much closer to making a purchase, possibly only a click away. “Poaching has been shown to be a viable strategy,” says Professor Kinshuk Jerath, the author of a new study on the strategic implications of this practice. “Companies need to know how to respond.”

Take the case of Skechers. “When a company sees its customers getting poached, often its first thought is to defend its keyword,” says Jerath, who worked on the study with Amin Sayedi of the University of North Carolina and Kannan Srinivasan of Carnegie Mellon University. Ads on Google are sold by auction, with the highest bidder winning the highest placement in the sponsored ad list, the second-highest bidder winning the second slot, and so on. (There are other factors that affect bidding and placement, one of which is discussed below.) “But in some cases — if your firm is larger or has a bigger advertising budget — it might be better not to bid highest in the auction, but rather to let the poacher steal your customer.”

Why accommodate the poachers? Because launching a bidding war drives up the price of keywords, making customers who search online more expensive to win. Also, not all potential customers who see a TV ad will do an online search before making a purchase; many go directly to stores. “Bigger firms can rely on the stream of customers that don’t consider or respond to sponsored search ads,” Jerath says, noting that in the Skechers case, it is Skechers — not Reebok, a subsidiary of the multinational Adidas corporation — that is acting like the bigger company, because it allocated a much larger advertising budget to its product.

For bigger firms, a better response is to air even more TV ads, Jerath advises. “It’s true that casting a wider net sends more people to sponsored search — which, ironically, benefits the poachers,” Jerath says. “But it also benefits the company that buys the TV spots, because their product is now getting even more exposure.” A company may inadvertently steer some new potential customers to the search engines for every additional TV spot it airs, but it is likely to gain an even larger number of less expensive customers through other channels, rather than fight for the more expensive customers being poached away by other firms.

What about the impact of poaching on search engines? It might seem that poaching benefits companies like Google, because more competition pushes auction prices higher. But Jerath found that while search engines do not prohibit poaching, they keep it in check. When a search engine detects an attempt to poach — which it uncovers by crawling the ad snippet and its landing page — it applies a relevance multiplier that handicaps, or reduces, the poacher’s keyword bid. For example, a poacher that bids $1 for a click might find its effective bid capped at 75 cents.

Why would a search engine reduce competition in its own auctions? Search engines don’t want to lose customers to TV and other traditional ad channels, Jerath says. “Google sees the benefit in keeping all of its customers in the auction, even though it is lowering prices,” he says. “If smaller companies are driving keyword prices too high, companies with big ad budgets will just jump to TV and radio.”

The study used data from Google Insights and Spyfu.com and analyzed sponsored ad results for products including cars, yogurt, and tax software. With companies spending $30 billion a year on search engine ads, Jerath concludes, “It’s important for all of the players to understand the underlying mechanisms of this market.”

Kinshuk Jerath is associate professor of business in the Marketing Division at Columbia Business School.

Read the Research

Sayedi, Amin, Kinshuk Jerath, and Kannan Srinivasan.

“Competitive Poaching in Sponsored Search Advertising and Its Strategic Implications on Traditional Advertising.” Working paper, Columbia Business School, September 2013.