The Branding Effect of Sponsored Search Advertising : Value-per-Click vs. Value-per-Impression

Advertising efforts mainly aim to build broader brand image and increase sales. In the online context, widely-successful sponsored search advertising (SSA), which predominantly employs performance-based schemes (e.g., pay-per-click), has been largely treated as a direct-selling mechanism. Recent empirical studies, however, have revealed the significant branding effect in SSA. Research investigating the branding effect and its interplay with the well-studied direct response effect is urgently called for. This paper is among the first attempts to formalize both types of advertising effects and the related budget decisions. One key element of our optimal control-based formulation is extending classical advertising response functions to capture the direct response and branding effects. Based on this formulation, we have derived the closed-form optimal budget policy. Both theoretical analyses and computational experiments have been performed. Our analytical results indicate that the advertiser's optimal budget decisions can be substantially different when the branding effect is explicitly considered. We also reveal experimentally that the optimal budgets for the advertisers with varying degrees of emphasis on branding can be substantially different. The reported work has important managerial implications. For online advertisers intending to promote (either exclusively or in combination with direct response) brand awareness and image, our work provides an analytical framework to facilitate their budgeting decisions and provide a closed-form solution. For search service providers such as Google, the reported work points to interesting opportunities in developing new business models and refining sponsored search market designs