Title: Optimal Spending for a Search Funnel.
With Shengqi Ye (University of Texas at Dallas) and Shanshan Hu (Indiana University)
Abstract: Many online shoppers conduct multiple searches before making a purchase. Accordingly, a firm’s search funnel is a network of keywords, which become more specifically tied to the firm as customers progress through the network.
In the search funnel, each keyword assists downstream keywords: When customers search for a keyword and click on the firm’s link, they learn about the firm and, hence, are more likely to conduct further searches for the firm’s downstream keywords. Therefore, the firm’s spending on each keyword influences how frequently the keyword is clicked, thus influencing both the immediate conversions from that keyword and the number of searches for downstream keywords.
With limited budget, the firm’s trade-off becomes: Spend more on upstream keywords, which are better at generating assists to the remainder of the funnel, or spend more on downstream keywords, which are better at generating immediate conversions? We find that if the budget increases or a keyword’s conversion rate improves, then the spending should shift from downstream keywords to upstream keywords. We also study two types of contracts for outsourcing search advertising to a marketing agency.
We find that both the firm and the agency benefit from a “pay-for-performance” contract over a “pay-per-spend” contract.