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Why CTRs for Yahoo aren’t necessarily a good thing

Fred Wilson writes on the new Yahoo system: A VC: Is Panama Working?.

… and includes this handy chart from comScore:

The question to pose is, are higher clickthrough rates better or worse for Yahoo?

The answer is, it’s really not clear. Let me explain: Total revenue for a text ad network is calculated by:

Ad revenue = CTR * PPC * Impressions

So if CTR goes up, the system is great, right? Wrong.

Why increasing CTRs aren’t necessarily a good thing
The reason is that CTR and PPC aren’t necessarily independent variables, and they can affect each other. If CTR goes up, but the number of sales stays the same, then each click is worth less. So then even though CTR is up, you decrease your PPC and you end up with the same number. (In the meantime, as an advertiser you complain about low conversion rates)

CTR could be a good thing, but it might not be. We need conversion rates to figure it out.

Is Panama going well or not?
The overall ad system is driven on a couple factors:

  • What publishers are signed up
  • What advertisers are signed up
  • How good the targeting is

… and each one of these factors is related. So my guess is that by improving the targeting, they will have a different success profile with the types of publishers and advertisers that are involved. As this changes, only then will we understand the pure impact of Panama.

The fact is, the types of publishers you work with are as much of a driver for ad revenues as the other stuff. If you have a publisher that drives tons of untargeted traffic, through obtrusive ads and confusing UI, then no matter how good your ads are, you’ll just drive junk ads. You need to get off these sites and onto higher quality ones in order to get better performance.

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