The Dirty Secret of Google’s AdWords Inflation

by Amelia Mango from Konnessi

In order to promote the use of AdWords advertising among small business owners, Google has started to offer $75 and $100 gift vouchers and even tech support to help the less computer savvy among us to set up AdWords accounts. Call the 800 number, rattle off your voucher code, and within a few hours you’ve got a ready-made account–all you need to do is launch it.

Or at least, that’s how it would work in a dreamworld where cars run on the power of wishes and there are no capital gains taxes. But you’re still paying through the nose to put 87-unleaded in your Grocery Getter and Uncle Sam takes 15% of whatever you can make playing the stock market these days. And, shocker, the only people Google’s deal helps are…..Google stockholders.

Let’s flash back to your freshman year, when the registrar gods shoehorned you into Macroeconomics 101 (yes, even though you were a Folklore & Mythology major at the time and inflation didn’t really figure into Norse legends of Thor and Freyja). You might or might not have slept through the lecture on Irving’s Quantity Theory of Money. Irving was for a time the rockstar of the economics world, which is roughly equivalent to being the supermodel of the Amish community. In any case, get ready for an equation:


There, that wasn’t so bad, was it? (If you want to have some real fun, look up Black-Scholes. Go ahead, I’ll wait.)

M stands for Money, which is both self-explanatory and a surprisingly logical variable, as economic equations go.
V is Velocity, which is defined as “total expenditures for a time period,” or, basically, how many times money changes hands over time.
P is Price, which can be best understood as a generic expression of how costly or cheap goods are.
T stands for Transactions. Now wait, you’re thinking, why have Transactions when you already have Velocity? Transactions refers to the number of purchases made in a certain period, while Velocity expresses the rate of circulation of money.

What the hell does this have to do with Google, besides making me Google a bunch of obscure economic terms, you’re asking yourself. We’re getting there.

The MV = PT equation means, roughly, that the amount of money available and how fast it’s moving are equal to the price rate multiplied by the number of transactions. There are a finite number of dollars, and they have to move at a certain pace in order for everyone to be able get paid and buy goods.

As some very basic math will show, changing any one of the four variables means that at least one other must change in order for the equation to hold true. We’ve all heard the big scary word “inflation,” but in this equation inflation just means that M (money) gets bigger, so P (prices) get bigger too.

It turns out that Irving was one SMART dude, because his equation applies almost perfectly to Google’s AdWords campaign. Here’s how: Google gives out “free” vouchers for Google AdWords. If you react to the word “free” like 99.9% of the population, you call a member of the Google Nerd Squad. In a comforting Southern drawl, he promises that he’ll help you get everything perfectly set up, ma’am. But as Google hands out these vouchers like candy on Halloween, something starts to happen. Between the $100 they’re technically giving you to get started and whatever charges your account incurs after that initial teaser money is dried up, there are a lot of very real dollars sloshing around the Google economy.

And here’s where the inflation kicks in. Google’s vouchers raise M, which for our purposes represents the amount of money in the AdWords economic zone. Velocity, or the number of searches occurring, hasn’t changed–the search habits of the general population are pretty static. We can assume T, the number of transactions rises a bit, because the vouchers are bringing in new users. But P is rising too–the average price of a search term.

So although it seems like Google is living up to its carefully-crafted image–that of a benevolent community of geeks bent on making our lives easier–it’s actually just inflating its own prices, both for customers with vouchers and for the corporations who were already paying for optimized search results.

And remember that charming gentleman from Dixie who helped set up your new AdWords account? Wait until you hear how HE figures in….

Amelia Mango is a blogger for Konnessi, LLC, a web development firm based in Providence, RI