Yesterday, Google announced a rare miss to earnings: Year-over-year, revenue grew ONLY 25% and profit a mere 7%. Analysts cited pricing as one of the key reasons for the miss, as the average pay-per-click price decreased by 8% despite growing volume 34% from a year earlier. Does Google have a pricing problem?
If you look beyond analyst reports, the answer is not so simple. The trend in web advertising has shifted in the last year, with individuals clicking on ads from their mobile devices rather than their desktop computers. Of note, mobile devices inherently drive lower price points than desktop clicks. Despite the lower average price, the growth in volume could not offset the decrease in revenue. This is a MIX challenge, not a pricing issue.
Google may still command a premium price for both its desktop and mobile pay-per-clicks relative to alternatives. However, due to structural changes in how people use the web, the mix of price points is causing a revenue challenge. The larger question for Google is twofold:
1) Are they able to maintain or grow their pricing power in each segment?
2) Are they able to maintain or grow their market share in each segment?
If the answer to these two questions is yes, then it certainly is a mix issue and not a pricing issue.
If you were in charge of pricing at Google, what actions would you take?