Paid search ad prices & the “mesothelioma lawyer” problem

Here’s an explanation on why Google and Facebook price ads as they do, from ecomonist/blogger/author Alex Tabarrok at Marginal Revolution. It’s a problem he calls the “mesothelioma lawyer” problem:

But suppose that Google or Facebook simply charge for ads by the click. Someone who searches for “funny hat video” isn’t likely to click on an ad for a mesothelioma lawyer but the people who do click are still likely to be very profitable to a mesothelioma lawyer. As a result, the mesothelioma lawyer can outbid the seller of funny hats for ads connected to “funny hat video” even though the search has nothing to do with mesothelioma. If Google or Facebook only charged by the click it would be mesothelioma lawyer ads everywhere, all the time.

To avoid this problem, Google and Facebook calculate how many clicks or interactions your ad is likely to receive and they charge lower prices the greater the predicted number of clicks. As a result, sellers of funny hats get lower prices than mesothelioma lawyers for ads that pop up after the user watches a funny hat video and mesothelioma lawyers get lower prices than sellers of funny hats for ads that pop up after the user searches for information on mesothelioma. In the long run this system better targets ads to customers and thus maximizes the value of the platform to both advertisers and customers.

This is from a post on why Trump paid less than Clinton for Facebook ads, written in response to a Wired article on the same subject that failed to explain why ads were priced as they were.

The concept should be kept it mind with any paid ad campaigns. Typically, make your campaigns and ads extremely relevant to your audience to get lower click rates. Or recognize that you are really just paying for impressions.

Andrew @ EcomLoop
Are you looking to start or grow a standalone ecommerce shop? I help independent businesses achieve success on the Shopify and WooCommerce platforms. As the owner of multiple ecommerce businesses, I've had the opportunity to get experience with nearly every aspect of the ecommerce industry. I started EcomLoop to help other quality independent businesses using my knowledge and experience. To stay on top of new ecommerce developments, I publish The EcomLoop Weekly Loop, a blog and email newsletter with original thoughts and curated links to help independent businesses improve their businesses.