How Google Could Lose $2.1 Billion. Or Not.

Google's advertisers mostly don't know what they're doing and, if they did, Google could lose as much as $2.1 billion in revenue, according to Jon Morris, founder of search engine marketing (SEM) company Internet Marketing Initiative.

Online advertisers can spend 30% less and still get the same results if they work with a capable SEM firm, Morris said. By Morris' estimate, only about 30% of Internet advertisers understand the intricacies of adverting analytics or are working with an SEM company. That leaves 70% wasting money.

Google says it supports more efficient advertising and insists that inefficient advertising is self-correcting. "Google provides free tools for measuring ROI and constantly educates advertisers on the value of tracking ROI," a company spokesperson explained via e-mail. "The adoption of our tools is high and customers frequently manage their bids. If advertisers are bidding inefficiently, the behavior will not be sustainable for the advertiser. Ultimately, we believe advertisers are spending in ways that deliver strong ROI and value to their business."

Morris' assertion isn't exactly shocking coming from someone with a vested interest in an SEM company. But it's provocative speculation. If 70% of Google's advertisers could do just as well spending 30% less, that would reduce Google's $10 billion-plus annual revenue by $2.1 billion.

Such sudden spending efficiency, however, is no more likely to happen than, say, 70% of the world's Tylenol users switching to generic acetaminophen, however sensible that might be from a cost perspective.

"In general, there are a lot of firms that are generating traffic, they're happy with the leads they get, but they're not really taking a sophisticated approach," says Morris. "In many cases, they're paying too high of a click-through-rate or they're not figuring out ways to optimize their landing pages to really maximize their conversion rate."

For example, in a situation where a company is paying $1 for one visitor and 30 cents for another, the temptation is to see the less expensive lead as more valuable. "It turns out that that $1 [visitor] might have a 40% conversion rate, compared to a 0.5% conversion rate for the 30 cent lead," said Morris in an interview. "Just by having a good data analytics system, you can make much more intelligent decisions about how you allocate your dollars to maximize your return on investment."

Morris says one of his company's clients, America Direct, a life insurance provider owned by Fidelity Life Association, has reduced its cost per lead from $150 dollars to less than $20 per lead since a year ago. Typically, he says, clients can reduce their cost per lead from 30% to 50%.

A different advertising model, such as the pay-per-action system Google began beta testing a few days ago, might accomplish the same thing.