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Maturation of Paid Search Means the End of the Free Lunch



There’s certainly been a lot of noise being generated by medium-sized companies, complaining they’re no longer getting the same ROI from paid search – especially from Google AdWords.

I’ve been taking a look at the trends and believe this is simply the continuing maturation of the paid search channel. Here’s how it’s developed thus far.

  • Stage 1 – Medium and Large companies spend huge amounts of money on banner ads. Small companies can’t compete, so they start experimenting with paid search and get great ROI with little effort.
  • Stage 2 – Medium companies start experimenting with paid search. Their campaigns are not very targeted but they’re able to get great ROI with little effort, so they start pumping in more money. Meanwhile, the small guys find that they can no longer compete for generic keywords, so start targeting the “long tail” and find there are great returns to be had from more targeted keywords.
  • Stage 3 – Large companies enter the paid search channel. They don’t spend a lot, as they are not convinced of the benefits. “Where’s the branding?” they ask. Medium companies start fine tuning their ads, work with landing pages, but still compete for the more generic keywords. Small companies have the long tail to themselves, they’re multi-variable testing, switching campaign creatives and getting great ROI from hard work.
  • Stage 4 – currently – Large companies are dumping huge amounts of money into paid search, but still with little measurement or fine tuning. Medium companies no longer have the budgets to compete with the ever-increasing bids, driven up by the larger companies’ ad budgets. They start complaining that they’re no longer getting the ROI and threaten to pull back paid search budgets. Some even go crazy and suggest they’ll spend it on television!
  • Stage 5 – the evolution in 2007 – Medium companies will discover that they need to be more aggressive with their campaign management and explore the “hidden” keywords known only to those marketing the long tail. There, they find lower CPCs and better targeted visitors. Small companies get crowded out and start exploring social media marketing, SEO, viral campaigns and locally-targeted search ads. Large companies realize they can’t afford to compete against each other’s monstrous budgets, and start backing off on their paid search spending, before finally discovering the long tail. Growth in the paid search space starts to slow as small, medium and large companies start becoming more savvy with their ad spend and other mediums start offering lower CPAs.

Bottom line? The “free lunch is over” and that’s exactly what I told Business Week, in this week’s edition.

So, that’s my analysis. Where are the gaps, what did I miss? I’d be dissapointed if there wasn’t at least one person who comments; “Andy, you got it all wrong!”. :-)

  • http://www.ppclab.com Evan

    Andy,
    I don’t think you are far off at all in this theory but I do think that although tools for measuring ROI have gotten better, there will be a bigger need for maximizing usability of the site to make sure that you are making the most of the traffic you are paying for. No longer can you flood your site with cheap traffic and hope that you convert a small portion into sales, you have to insure that your website is up to standards or you will be wasting money.

    I don’t paid search will completely fizzle, its too important and the traffic numbers / ROI numbers are still highly tangible. Companies will just need a dedicated experienced person to handle their campaigns. I guess it puts all of us paid search managers in a better position

  • http://www.naymz.com Tom Drugan

    Andy,

    I think your observations of the evolution of paid search is spot on. I think all of us who have who have worked in the small/mid sized direct response space knew that paid search would eventually be commoditized by the big fish once they understood how to run a well oiled campaign (creative, measurement, bid management, optimized landing pages, tail terms, etc.). I equate it to the oceanic eco-system.

    Copepod (small business) and seals (mid size businesses) have a scavenger approach. They scour the ocean and are willing to try anything that looks editable. With paid search, the copepod and seals found an enormous, scrumptious food supply that would keep their bellies full for years. The sharks (big business), eating off the same stale food supply (television, radio, print) that was stripped of most of its nutrients long ago, started to wonder what all the paid search fuss was about. They decided to check things out much to the chagrin of the copepod and seals. The sharks, being the stubborn creatures they are, liked what they found but were not comfortable out of their comfort zone so they only dabbled with the new food source for a few years. Eventually, the sharks realized how delicious and healthy this paid search food source actually was and decided to spend more time feeding off of it. More sharks followed. The copepod and seals were forced to eat off of the leftovers (tail terms) which the sharks didn’t want to waste their time with. The smaller guys were also had to get creative/smarter with how they went about feeding. Now that the big chunks are diminishing, the sharks are starting to go after the leftovers which are forcing the copepod and seals to start looking for other food sources which may include going back to the old stuff that the sharks have abandoned.

    Sorry for the drawn out analogy. I guess the moral of the story is that it sometimes sucks to be the copepod.

  • http://www.marketingpilgrim.com Andy Beal

    Tom, that’s an excellent analogy!

    Evan, I’m sure you could recommend a qualified company to help folks with their ppc, correct? ;-)

  • http://www.futurenowinc.com Bryan Eisenberg

    Andy,

    I couldn’t agree with you more. I described this phenomenon as “crackvertising” back in July. You can see our post about it at http://persuasion.typepad.com/architect/2006/07/crackvertising_.html .

    Evan, you mention maximizing usability, however usability is just one small piece of the equation. We need to look beyond usability [http://www.uie.com/articles/beyond_conversion/]. Usability will help those that have a desire to buy, make it easy enough for them to buy. That is usually a small percentage of traffic that is late in their buying cycle.

    The major issue is persuasion, how do you help those that aren’t ready to buy, and build desire so that they become confident to even want to buy.

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  • http://blogs.commerce360.com Craig Danuloff

    All true enough, but an analysis of keywords in the diamonds business (to follow up the BW’s Zales comment) shows that it isn’t big guys filling the pages. There are definitely segments where your sequence is playing out, but others where it either hasn’t started yet, is several steps behind, or will never start.

    Part of the ‘answer’ is improving conversion as Bryan suggests, a bit is in the long tail as you suggest, some is in things like the ascent of the Quality Score which stop firms from just buying up every keyword they can think of, and some has to come from people realizing they really dont’ want to shop at Best Buy or Zales!

  • http://www.topright.com Ron Pereira

    Guys, this is really interesting and something that was emerging in Xmas 2005. Below, see the direct quote from the Blue Nile conference call from that time.

    The quote below and research from Craig Danuloff support tht they are still in Stage 4 for this Christmas (at least Blue Nile). Or perhaps Blue Nile has invested in something like Offermatica and can actually make money from the head of the tail.

    Enjoy…

    Blue Nile Inc. Q4 2005 Earnings Conference Call Transcript

    …during December, we saw extremely aggressive increases in the cost of online advertising. Our cost per click on Google, for example, rose by over 50% from a year earlier. While the cost of online marketing grew significantly in Q4, we remain disciplined in our spending in order to maintain profitability on new customers rather than to chase unprofitable growth, as some of our competitors have done.

    Our marketing efforts during the fourth quarter were skewed toward search engine advertising. Given our experience over the past few years with paid search, this seemed like a prudent decision entering the quarter. However, with increased costs for paid search in Q4, we were unable to drive as much profitable traffic as we would have expected. Given these results, we will be looking to broaden our marketing efforts beyond search in the future. As we seek alternative marketing vehicles to complement our efforts in paid search, I would expect growth to be relatively conservative as we ramp our efforts toward broadening our marketing outreach. This is the right long-term solution for our business.

    As I’ve stated before, throughout all of our marketing efforts, our focus is on the maximization of gross profit contribution, in keeping with our overarching objective of free cash flow generation. For the quarter, repeat and referral sales showed excellent growth, which is a strong testament to the value of our efforts in continuing to obsess over the customer experience. This also points to our ability to monetize customers following acquisition.

  • http://www.marketingpilgrim.com Andy Beal

    Thanks Ron. I actually pointed that out to Business Week. It seems there’s always someone complaining about the rising price of PPC, but it’s at its loudest right after the end of the holiday period. All CPCs go up in the holiday shopping period, and lots complain, but things usually settle back down, and so do the complaints. ;-)

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  • http://vijaychallait.blogspot.com Vijay

    You surely have a point Andy, but my thoughts are that paid search is hear to stay, no matter what..
    Internet, IMHO is just another “media” and a medium that is being increasingly adopted.
    We see ads on Television and there has only been an increase in the number of ads we see. Although there is no competition for keywords, there is a lot of competition for “prime-time” slots, which when taken in the right context can co-relate to “search key words”. For example, ads for Nike in between basketball games? I am sure Nike, Reebok, Adidas etc etc would have all competed against each other and Nike won the bid. Competition didn’t destroy ads. It just made them more creative, probably made them shorter. What do Reebok and Adidas do? They either advertise on other channels, or at different times…Same with internet. Companies will get creative with “word choosing”, maybe “channel” choosing which will equate to the various “vertical search” engines abound/ other search engines that might slowly gain importance (don’t see Google losing any significance anytime soon)…Companies will use Television/ audio-visual media to bolster it’s image in the internet world by pushing keywords into viewers brains etc

    I feel SEO’s like you would have a very big role in shaping out this market and can help in a product’s positioning on internet no matter what the conditions are and how small a company is…

  • http://www.hanapinmarketing.com Pat East

    By talking only about the increase in bids, Business Week incorrectly assumes that the bid is the only or main variable that determines ROI. Their article implies that if the bid increases, then an advertiser’s ROI necessarily decreases.

    This couldn’t be further from the truth. Thinking that the bid is the only variable is why so many companies are getting unnecessarily burned by PPC.

    BW mentions Baby Age specifically. They generated more clicks but fewer but fewer buyers: “Even as BabyAge’s $1.2 million worth of search ads got more clicks in 2006, they netted fewer actual buyers, effectively doubling their cost.”

    This quote should be a big red flag to Baby Age and all other PPC advertisers! Baby Age’s ROI is decreasing not because of increased bids but because of lower conversion rate!

    Babe Age and Business Week have somehow overlooked this. There are several variables or levers that can affect a PPC advertiser’s ROI. I call them levers because when you “pull” any of them, you can dramatically affect your ROI.

    Search Venue – Google AdWords, Microsoft adCenter, Yahoo! Search Marketing and niche search engines like Business.com can yield dramatically different ROIs. Many companies advertise only on Google (in fact, some of our clients refer to “pay per click” as “adwords”) and many more don’t even try the niche search engines. For most of our clients, we advertise on as many search engines as possible. For some, the ROI just isn’t there, so we shift the budget to other search engines. We often advertise only Google or only Yahoo for particular clients because those generate the best ROI for them.

    Keyword Research – Andy mentions that small sized companies have already targeted the long tail and that medium sized companies will start to do so in 2007. In my experience in managing PPC campaigns over the last 7 years, I have not seen this. Most small companies are too busy focusing on the day-to-day operations to even realize they need an extensive keyword list (many prospective clients of all sizes gasp when I say that we could easily expand their keyword list to 1,000-10,000, which for some clients is still too small). Most medium sized companies want to rank well for main high-traffic keywords because they don’t realize there’s other keywords to target. Some want to impress their sales force or board of advisors/directors because vanity is more important than how much traffic or leads they’re generating. That’s not to say that all small or medium sized companies fit these molds; just the ones we’ve had contact with.

    Bidding Strategy – You can have a bidding strategy? Historically, most companies have been too focused on what their bids are (because bids play the biggest part in determining the #1 position, which most small and medium sized businesses think is the holy grail) instead of how much traffic they’re generating or what their ROI is from those particular bids. For most industries, the #3-#5 positions typically generate 75%-80% of the leads/sales that the #1 position does but for 50% of the cost. Need further proof of the focus on bids and not on ROI? The number of pages on Google for “bid management” is 29 million. For “day parting,” it’s less than 1.5 million. A tactic like day parting could help a ton of advertisers but most companies don’t even know it exists.

    Ad Creation / Landing Page Creation – When Google introduced their quality score, they forced all advertisers to do what the best advertisers were already doing—making their ads and landing pages as relevant as possible to their keywords. Google has specifically introduced this because too many ads were (and still are) irrelevant. They know that if they can force advertisers to create more relevant ads, they’ll generate a higher ROI. Google, by virtue of introducing the quality score, is necessarily saying that there’s another variable to PPC that just bids!

    Heed what Google is trying to tell you with their quality score and stop listening to publications like Business Week who proved with their expose on click fraud that they have no idea how the online world works.