Where we get the numbers
How we calculate Google’s economic impact
We derive a conservative estimate of Google’s economic impact in each state by examining the economic value provided by Google Search and AdWords, Google AdSense, and Google Ad Grants in 2015. Visit the search and advertising tools page to learn more about these programs.
Google Search and AdWords
To estimate the economic impact of Google Search and AdWords, we rely on two conservative assumptions. First, that businesses generally make an average of $2 in revenue for every $1 they spend on AdWords. Our Chief Economist, Hal Varian, developed this estimate based on observed cost-per-click activity across a large sample of our advertisers; his methodology was published in the American Economic Review in May 2009. Our second assumption is that businesses overall receive an average of 5 clicks on their search results for every 1 click on their ads. This estimate was developed by academic researchers Bernard Jansen and Amanda Spink based on sample search log data and published in the International Journal of Internet Marketing and Advertising in 2009.
If search clicks brought in as much revenue for businesses as ad clicks, these two assumptions would imply that businesses receive $11 in profit for every $1 they spend on AdWords. This is because, if advertisers receive 2 times as much value from AdWords as they spend on AdWords, and they receive 5 times as much value from Google Search as they do from AdWords, then the total profit they receive is 11 times what they spend, or
2(spend) + 5 x 2(spend) - (spend) = 11(spend)
However, clicks through search results may not be as commercially valuable as ad clicks, so we want to be conservative: we estimate that search clicks are about 70% as valuable as ad clicks. This means advertisers overall receive 8 times the profit that they spend on AdWords, or
2(spend) + .7 x 5 x 2(spend) - (spend) = 8(spend)
Therefore, we conservatively estimate that for every $1 a business spends on AdWords, they receive $8 in profit through Google Search and AdWords.1 Thus, to derive the economic value received by advertisers, we multiply our AdWords revenue on Google.com search results in 2015–what advertisers spent–by 8.
The economic impact of AdSense is simply the estimated amount we paid to website publishers in each state in 2015 for placing our ads next to their content.
Google Ad Grants
Similarly, the impact of Google Ad Grants is the total amount spent by grants recipients in 2015 out of the $10,000/month awarded to them.
Total economic value
Total economic value for each state is estimated as the economic activity provided for local businesses, website publishers, and non-profits by Google Search and AdWords, Google AdSense, and Google Ad Grants, respectively, in 2015.
What’s not included
This is an attempt to estimate the economic impact of Google’s core search and advertising business. In search and advertising, we’ve derived a conservative estimate of the impact of our tools on businesses, website publishers, and non-profits, but we’ve left out such estimates as the cost savings for consumers now able to find the information they need more easily than before. We also have not estimated the economic impact our employees provide, or that of other major products like Google Maps and YouTube. So while we’re confident in our estimates, consider them a lower bound on Google’s true economic impact.
- More on methodology and how we estimated the value of Google Search and AdWords.
- Varian, Hal. "Online Ad Auctions," American Economic Review, May 2009.
- Jansen, Bernard and Amanda Spink. "Investigating customer click through behaviour with integrated sponsored and nonsponsored results," International Journal of Internet Marketing and Advertising, 2009.
1 Those numbers are estimates only and are not a guarantee of actual advertiser performance using Google AdWords.
Estimating the value of Google Search and AdWords
Here’s an example of how we estimate the value of Google Search and AdWords to advertisers.
AdWords: Estimating the value of ad clicks
Suppose we have a single advertiser who bids $5.00 per click. According to the rules of the Google auction, this advertiser only pays the minimum amount necessary to retain its position in the auction, which we will assume is $4.00 per click. At the $5.00 bid, let’s suppose that the advertiser gets 400 clicks a week, yielding a total cost of $1600 per week. If the advertiser’s value per click is v, then his total surplus from using AdWords is 400v - 1600. This formulation is summarized in the first row of this table:
|v||$2.00||$1.00||300||$300||300v - 300|
The advertiser could cut his bid to $2.00. We can use Google’s Bid Simulator to simulate the effect of this change. Possible values are shown in the second line of the table.
If the advertiser is choosing bids to maximize its surplus, then the surplus associated with the bid actually chosen should be higher than the surplus associated with some lower bid that wasn’t chosen. This means:
400v - 1600 > 300v - 300
Solving this inequality shows that the advertiser’s value per click is at least $13. Hence the total value the advertiser is getting from AdWords is at least $13 x 400 = $5200. Since the advertiser is only paying $1600 for these clicks, he is getting a net surplus of $3600.
We did calculations like this for a large random sample of AdWords advertisers and found that on average the total value of clicks was about twice the cost of those clicks. This is only an estimate, of course. It relies on the assumption that advertisers are trying to maximize their profits (surplus) from AdWords, and that the Bid Simulator gives good estimates of what would happen if an advertiser changed its bid.
Since the gross value of ad clicks is about twice the cost of the clicks, the net value – the "surplus" that the advertiser makes on the clicks – is equal to the cost of the clicks. This methodology was published by Hal Varian, Google’s Chief Economist, in the May 2009 issue of the American Economic Review.
Google Search: Estimating the value of search clicks
But this isn’t the end of the story: Advertisers also get a substantial number of free clicks from the search results. According to academic researchers Bernard Jansen and Amanda Spink, there are about 5.3 times as many search clicks as ad clicks when search and ad links are both present on a page. To be conservative, we rounded this down to 5.
Of course the search clicks may not be as commercially valuable as the ad clicks. Again, we will conservatively suppose that search clicks are about 70% as valuable as ad clicks. Putting all this together, we have developed this table.
Suppose an advertiser spends $10 on AdWords.
|Cost of ad clicks||$10|
|Gross value of ad clicks - 2 times cost||$20|
|Search clicks are worth 70% as much as ad clicks, but there are 5 times as many||$70|
|Net value of search and ad clicks||$80 = $70 + $20 - $10|
The bottom line is that search plus ad clicks create a net value to the advertiser of about 8 times the cost of those clicks.
Of course, this is not pure incremental value. If search engines did not exist, advertisers would find other ways to advertise their products and bring consumers to their stores and websites. In the real online economy, however, the value to advertisers of the ads and search clicks that occur on Google appears to be quite substantial.