Rational Expectations in the Search Industry

Posted on | May 7, 2009 | 1 Comment

Facing Expectations The theory of rational expectations is considered an economic school of thought; which is also regarded as a ubiquitous modelling technique that is used widely throughout economics and can be more broadly applied to other fields.

Rational expectations describe the many economic situations in which the outcome depends partly on what people expect to happen.

People abandon a currency that they expect to lose value, which in turn contributes to its loss in value. One of the earliest applications of the theory of rational expectations was to the stock market, in that consumers utilise all the information available to them to purchase the stocks that they expect to have a higher than average return and sell those with a lower expected return. This in turn raises the price of the stocks with an expected higher return while drops those with an expected lower return.

In forming their expectations people try to forecast what will actually happen. As they make forecasts on a particular price / topic / share, a number of times, they begin to adjust their forecasting rules to eliminate avoidable errors. This creates a feedback loop from past outcomes to current expectations.

Adjusting SEM Expectations
Now, this taken from the perspective of utilising the services of a search marketing firm can be applied as follows:

At the onset, people utilise all the available information to create their expectations of an SEM contract with a particular firm. These expectations are set by the information available on the company website, supplementary online research, discussions with representatives at the company, the proposal and the final contract. If the SEM agency performs, as the client expected, this will raise the value of the service provided, as well as increase the credibility of both the agency and the search engine marketing field.

If, however there is disequilibrium in the forecasted outcome owing to some ‘shock’, such as the SEM agency not delivering on an agreed component of the service agreement, the client will in the future, factor in any of these random elements that could not have been known in advance thereby affecting future expectations of service delivery by SEM firms.

When clients act collectively, as buyers do in the stock market, and utilise all the information that they can find in their assessment of search engine marketing and decide whether to outsource this activity to an SEM agency, the outcome of these expectations, when negative, will affect the overall credibility of the SEM industry.

Factoring in the Unexpected
Hence, by not implementing any official standards in the SEM industry, this leaves the market with very low barriers to entry, thus allowing anybody who is so inclined, to set up a website, advertise it and offer SEM ‘services’.

Every time a client uses the services of an ineffective and incompetent SEM firm, this is then factored into the client’s expectations, who is behaving in a rational way to maximise their utility (their enjoyment / profitability of using the service). Therefore, as the number of clients, who speculate about the future inaction / failure of an SEM firm, grows, this becomes a crucial factor in determining current action in the decision NOT to outsource the SEM work, and keep it in-house.

Unless, the search engine marketing industry does something to clean up its act and begins to restore credibility and service quality, the value of utilising outsourced SEM services will continue to drop, much in the same way a stock that is not expected to perform drops in price. If the perceived cost of working with an SEM firm, outweighs the perceived value, an increasing number of clients will walk away from the SEM outsourcing game.

Category: Industry Standards
Tags: SEO Standards

Comments

One Response to “Rational Expectations in the Search Industry”

Striking Out WITHOUT SEO Standards | SEM Street Cred
April 28th, 2010 @ 10:05 pm

[...] trust that you have built with the client and creates a hurdle in the relationship. It creates a disequilibrium in the expectations the client had of your service [...]