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Google’s free product listings disappear in October — but with months to plan, it should come as no surprise. In fact, for those who follow the industry, even the initial announcement was not a shock.

“When we talk to clients about this, we often hear ... ‘We knew this was coming,’” says Eric Best, CEO and chairman of online retailing and performance marketing firm Mercent. “Amazon certainly doesn’t deliver customer orders and revenues to third-party retailers for free. eBay doesn’t. Google has really stood alone in terms of their willingness to let the traffic flow through the platform.”

Google has been tweaking the experiment practically since it was announced. But come October, retailers will have to bid on how much they’re willing to pay for listings to appear and result in clicks (cost-per-click) or sales (cost-per-acquisition). The highest placement will be a combination of relevance — dependent upon the quality of the data submitted — and bid.

Market share opportunity
Google is selling the changes as an enhancement reflecting the current state of retailing.

“We see retailers as being at a big inflection point,” says Sameer Samat, vice president, product management for Google Shopping. “Will the retail world be dominated by a handful of players, or will a diverse ecosystem of retailers continue to thrive? We believe that diversity is great — it leads to more innovation and a better experience for shoppers, which is better for everyone.”

Google Shopping is “investing significantly in technology to create a positive end-to-end experience for shoppers,” he says. “Google is not a retailer, but we have a stake in the overall retail experience going well, from how you find the things that are available in a physical store to helping you find what you want to buy from an online store.”

The changes are being embraced on the retail side. “We felt it was likely inevitable that they’d streamline the different ad formats that they had,” says Erica Barth, vice president of products and partnerships for Resolution Media, a digital marketing firm that works with many leading retailers. “For the most part, the product-specific feeds performed better for our retailers, and we’d expect similar performance with these changes.”

There’s also an opportunity to grab market share. “By virtue of the fact that you have ad budget attached to the channel, the stakes are higher for the retailer,” Best says. “If the program performs well, you have the potential to outperform other competitors who are less savvy.”

“The stakes are higher with this program because retailers have to manage both the spend side and the revenue side,” he says. “The complexity has increased, but a retailer’s opportunity to set their brand apart increases” as well.

Driving the change
Google Shopping was designed with what Samat terms the “Three Cs” in mind: connect, click and convert. “We want to connect retailers with consumers at the moment of interest, we want to remove all possible friction from the shopping process so that people can easily make a click and turn their shopping intentions into purchases, and we want to help retailers improve their conversion rates using technology,” he says.

Best puts it in more competitive terms: “They’re trying strategically to get closer to the model that Amazon and eBay follow, trying to create the ideal shopping experience for shoppers on Google,” he says. “Amazon represents a competitive threat for consumer loyalty on the web. If you have a choice of where you’re going to start your shopping experience, I don’t think it’s an oversimplification to say that it’s becoming binary — [shoppers will] start at Amazon or Google.”

Samat thinks more consumers will choose to start at Google. “We believe our role in helping the ecosystem includes improving conversion rates so that the end-to-end experience for the consumer, the retailer and ultimately Google is successful,” he says.

Much of that success will be determined by the quality of the data retailers provide to Google. “A long-standing concern has been picking keywords that are optimal for every one of those products,” Samat says. “Google Shopping allows [a retailer] to upload those products in a data file format and to tell Google what it, as an advertiser, would be willing to bid on a cost-per-acquisition or cost-per-click basis for each and every product. Google does the optimization of showing the right product at the right time with the right query.”

Leveling the playing field Taking Google to paid-only will allow retailers to focus on operating efficiencies and retail strength, Best says. “The way Amazon operates with third-party sellers, it comes down to the quality of the data and the competitiveness of the merchandising offer, all of those elements that competitively position one merchant’s offer against another: product price, shipping prices, seller rating, time to ship the product,” he says. “They are not potentially obscured by the expertise or technical capabilities in terms of keyword discovery and creative content writing. In some ways you could argue that Amazon’s approach historically is a more pure e-commerce approach.” One positive outgrowth from the changes will be a more-level playing field, as gray market retailers — those who compete on low prices that disappear at checkout or merchandise that is no longer in stock — must put dollars behind their advertising. Rocky Glaze, director of paid search and affiliate marketing for the online home improvement retailer, believes that the new structure’s more stringent data standards will prevent “gaming the system with incorrect prices or SKU changes.” It also will provide “greater flexibility and insight into what is working, with a lever to pull to gain more traffic.” Barth agrees. “This gives us an opportunity to take what we’ve learned from paid search campaigns and apply the insights of what works well for these ad formats — accurate information and optimized product feeds. It really comes down to, ‘Do they have a strong feed with the right partners and technology to manage that effectively?’”

Positive early results Google can’t be accused of keeping the changes quiet. About half of Mercent’s 400 retail clients that use the free listings — including The Home Depot, Office Depot, HSN and Bloomingdale’s, and which represent about $2 billion in combined online sales — have tested the paid listing ads (PLAs) in the last 18 months. “If you look at the program through our clients, the year-over-year growth rates have been in the thousand percent-plus” range, Best says. “Google is about 25 percent of revenue, or half a billion. The paid listing ads have grown from zero to about 35 percent of that half billion. Independent of the changes that Google has made to the free program, the paid program has definitely been growing.” While Mercent may represent the opportunity that comes with the changes, there still are facets that are unknown — and retailers who will be hurt. “The general reaction from our clients is, ‘If we can hit the efficiency or return target that we’ve set, we intend to fund this program the same way we would any other channel,’” Best says. “The other story that we hear is the opposite ... ‘We’re already operating at razor-thin margins. The free traffic that was being driven through Google product search was driving revenues that were funding paid channels. Not only does this represent a loss of revenue, but it also represents a potential drop of the available marketing budget.’ “Maybe what it does is serve to amplify the gap between the high-performing merchants and the low-performing merchants,” Best says.

Building consumer confidence The changes to Google Shopping also bring the opportunity to enroll in Google’s Trusted Stores program. Participating retailers provide Google information about their customers and performance; Google independently verifies the information, aggregating it into a grade. Consumers who purchase from companies with an A rating also receive a $1,000 protection guarantee from Google. “It’s a better experience for users,” Samat says. “Whether it’s a company that they haven’t done business with ... they can rest assured that this is a great place to do business. We’ve found by putting this badge on a merchant’s site the merchant experiences between a 1.5 to 8 percent listing conversion rate from all the traffic they receive.” Even for large retailers like those who use Resolution Media, the program makes sense. “We will be working with all our retail clients to make sure they apply,” Barth says. “It’s important even for well-recognized brands to participate in these types of things to improve performance.”

Timing is everything Among the inherent challenges associated with the Google conversion is the fact that free listings will disappear in the fourth quarter, when retailers’ budgets have been allocated and the holiday shopping season is getting underway. “Advertisers will have to make sure they have appropriate budget allocations to support this,” Barth says. “It is likely they’ve already done a fair amount of planning around these types of channels. We can look at the holistic picture in real time and see what’s performing to meet our clients’ goals. That’s where an integrated approach across online marketing is most successful.” But the changes could also bring a shift in the balance of power. “We’ve seen an interesting dynamic over the course of the last year, which is directly relevant,” Best says. During the first three quarters of 2011, Google was “a bigger contributor to overall retail sales to our platform,” Barth says. “In the fourth quarter the roles were reversed: Amazon has been the dominant contributor to sales. “It will be interesting to see how these changes may affect that phenomenon,” he says. “This may be the first year that we see a change in that balance of power in the fourth quarter. Worst case: It may further solidify Amazon’s position of strength. If bidding for placement on Google becomes an alternative to highlighting the cheapest products from the most reputable sellers, there’s a downside to the changes as well for Google.”