Analysis & Commentary:

INSIGHTS INTO DEVELOPING PAID PLACEMENT STRATEGIES

A recent study co-authored by two researchers in Penn State's Smeal College of Business provides information gatekeepers on the Internet and World Wide Web with insights into developing paid placement strategies, such as a fee for preferential placement in the database, an increased relevance score in response to a query, featured listings on the results page or some other form of prominent display.

"On one hand, paid placement appears to be a financial necessity, embraced by most information gatekeepers, such as the major Web search engines. On the other hand, paid placement can hurt the gatekeeper's market share and its potential for advertising strategies," explains Hemant K. Bhargava, professor of management science and information systems in Penn State's Smeal College of Business. Bhargava and Juan Feng, a doctoral student in Smeal College, have developed a mathematical model for optimal design of a paid placement strategy.

Information gatekeepers specialize in collating, aggregating, and searching massive amounts of information on the Web, and can often charge consumers, advertisers, and information providers, for their ability to acquire and transmit information. They take on many forms -- search engines, comparison shopping sites, directory services, digital libraries, etc. -- but they are crucial entry points in today's information society.

"Even after transitioning into commercial entities, search engines relied heavily on advertising revenue and operated as a free resource to content providers and users. However, the recent drop in Internet advertising and cheap venture capital has forced commercial search engines to develop ways of generating revenue from content providers," says Bhargava.

"Content providers also like the idea of preferential placement. It is well known that the rankings of a result term is strong correlated with the probability that the user will follow up on the result term. Commercial content providers are interested in clickthroughs and conversion rates. For this reason, content providers have an incentive towards paid placement," says Feng. "However, paid placement strategies have a negative impact on a search engine's perceived quality and credibility. Generally speaking, search engines must act as referees of relevance or they will lose market share."

Since loss of market share causes a fall in advertising revenue, search engines must trade-off potential revenues from paid placement with those from advertising.

The researchers analyzed the gatekeeper's tradeoff between revenue from paid placement and the potential loss in advertising from the loss of credibility. Specifically, they determine the optimal paid placement policy -- the optimal placement fee and the resulting percentage of sites that choose paid placement.

The results show that in general the gatekeeper should set paid placements at a below-ideal level due to the tradeoff. However, when disutility for paid placement is quite low, the gatekeeper can maintain its ideal placement revenues. The researchers also found that an increase in the gatekeeper's quality of service allows it to improve its utilization of paid placement. This also increases benefits for all players. However, an increase in the advertising rate motivates the gatekeeper to increase market share by reducing further its reliance on paid placement. As consumers get a better understanding of the factors underlying paid placement, the gatekeeper would likely need to spend heavily on marketing campaigns in order to minimize users' perceived disutility for paid placement.

The researchers are pursing extensions of this work, and their longer-term interest is to determine the optimal bias-level that would give a gatekeeper the best balance between advertising and placement revenues. They will present their paper, "Paid Placement Strategies for Information Gatekeepers," at the Eleventh International World Wide Web Conference. It is scheduled to take place May 7-10, 2002 in Hawaii.