September 20, 2007 | Thursday

Google Best Practice Funding

By Admin  in Latitude Publications |White Papers

Google announced on September 20th 2007 that Best Practice Funding (BPF) will be removed in 2009. Effectively they are giving agencies 15 months' notice of termination of the scheme.

There are also some changes in 2008 including:

• No growth kicker
• Existing tiers for rebates lowered from Euro 4M upwards, making higher rebates achievable quicker. This will equate to a small increase in total rebate for agencies
• Removal of incentives for new ad formats (e.g. video ads, mobile ads). All spend will be included in the spend tiers
• BPF targeting handled automatically so separate campaigns will no longer be required for non-BPF countries on international projects.

Our view

• Latitude has been in discussion with Google for a number of months on Best Practice Funding. Its removal in 2009 is fundamentally in line with our proposal. We as such welcome the news.
• The removal of BPF is a massive blow for Search Marketing Agencies that rely on high volume and low added value. Conversely it is good news for Latitude that has high volume and provides high added value i.e. our profitability is not dependent on BPF unlike many of our closest competitors
• Ultimately this is good news for search marketing in the UK. Advertisers will gravitate to agencies that can provide added value and will as such enjoy superior returns and better representation in the marketplace.

Why we think this

Latitude welcomes the Google announcement on BPF being removed in 2009. We have been in consultation with Google for several months and the outcome closely matches our proposals.

No BPF, no low value-add agencies

It’s important to remember why the BPF exists in the first place. Put simply, Google wanted to encourage the growth of search marketing and the development of agencies that understood paid search and how to generate returns for their clients. It was a “fire-starter”. The fire is now well and truly ablaze with agencies flourishing. There are over a hundred agencies in the UK offering paid search with a breakaway group of five agencies dominating the market: Latitude, Search Works, Publicis, WPP and Aegis.

The issue is that BPF has fallen into disrepute due to “sharky” tactics of many big players who have simply chased volume at low or indeed no added value. Many agencies rely on the BPF for profitability and construct deals that are literally “pass through deals” with the sole purpose of gaining commission. The BPF was as such no longer working for Google or for agencies such as Latitude that maintained high added value services throughout.

It is a blow against the low added value agencies and we may ultimately see their demise and great news for high added value specialists.

Great news for innovative agencies and their clients

Latitude is not dependent on BPF for profitability which is why we welcome the changes. We are in a unique position of having high volume and offering high value services. In fact the value we add is related to the volume of campaigns we manage now and historically. This bank of data combined with our analytical tools and the experience and expertise of our people mean we get better results which we can charge for. We are also the only one of the “big five” who provide both Paid Search and Search Engine Optimisation and the synergies in returns that offers.

Many pure Paid Search Agencies rely on ridiculously thin margins. They are often completely reliant on the commissions from Google. They have 15 months to change their business model or die. It will be incredibly hard to move from low added value to something they can charge clients for. That’s the prospect many agencies are now facing. Don’t be surprised to see the media awash with negative comments and complaints from these players in the coming weeks and months.

The chief beneficiaries are the Paid Search Agencies that offer high added value. Their clients also benefit. Clients will now transparently pay for paid search. The agencies adding value will be able to charge more because they deliver more. No BPF is therefore great news for innovative specialists, small and large, but massively disruptive for bigger low added value players.

The new marketplace

We predict that the next two years will see tremendous churn in the clients of the big, low value add agencies and inter-related churn in employees - with the more skilled people joining the innovative agencies.

Clients will see unit prices rise, but the overall spend on Google will decline to compensate this. This will be neutral for Google since it will be compensated by the non-payment of commissions.

There will also be some very interesting opportunities for Google’s competitors. Yahoo may follow suit as they did after the last change to Google BPF. Microsoft could see it as the opportunity they have been waiting for to “fire-start” their business. The Live product is improving all the time and could see strong growth. Similarly Ask could see this as a great chance to expand into the UK market. Other vertical players may also see this as an opportunity to by-pass Google and drive business direct.

How will it affect Latitude?

• Unlike virtually all other paid search operations Latitude are not reliant on Google commissions for profit
• Latitude add significant value that is closely measured by our clients and we charge for that
• Latitude will gain significant amounts of new customers from the low added value volume players
• The Cost per Application (CPA) deals will self regulate as Google market prices will reduce by the amount of removed commission as the market finds its natural equilibrium.

Client enquiries
Richard Gregory: richard.gregory@latitudegroup.com or tel: 01925 413 513
Judy Dewsbury: judy.dewsbury@latitudegroup.com or tel. 01925 413 513

Press enquiries
Matt Brocklehurst: matt.brocklehurst@latitudegroup.com or tel: 020 7952 8000
Richard Gregory: richard.gregory@latitudegroup.com or tel: 01925 413 513