Responding to CPC Inflation
Recent buzz in the press and blogger community indicates that costs per click (CPCs) are rising and performance falling. MarketWatch mentioned several advertisers who were pulling back or reallocating their Google AdWords spend, but putting CPC pricing trends in context helps us more thoroughly understand how growing search campaigns evolve in this dynamic market.
A familiar trend
The Performics 50 index tracks the evolution of 50 well-managed search campaigns, providing a stable basis for comparative benchmarking and analysis. The quarterly index analyzes keyword costs over several years, specifically CPC and cost per keyword (CPK), a metric representing an entire search program’s overall cost. CPK is the total monthly cost of a search engine marketing program divided by the number of keywords that received clicks that month (active keywords).
Below you can see the quarterly cost trends from the Performic 50. (Note: Fourth-quarter data are preliminary and subject to change. Watch for our Q4 trend report in mid February at www.DoubleClick.com/us/knowledge_central/.)
Change in quarterly CPC: Performics 50 Index
Year over year / Quarter over quarter
Q1 2005: – / (10%)
Q2 2005: 11% / 10%
Q3 2005: 41% / 9%
Q4 2005: 23% / 13%
Q1 2006: 11% / (19%)
Q2 2006: 15% / 14%
Q3 2006: 30% / 24%
Q4 2006: 18% / 3%
These data illustrate consistent growth in CPCs year over year and quarter over quarter, but the CPC growth rates have slowed in the second half of 2006, with slower year-over-year growth and the lowest quarter-over-quarter growth in the history of the index.
Seasonal peaks also affect keyword pricing trends. Costs hit annual high points during the holiday season, tapering off drastically in January. In January 2006, for example, keyword costs fell by 19% and did not return to December 2005 levels until July.
Inflation or more-aggressive investment?
Alone, these CPC metrics do not account for the different factors at work: supply/demand and competitive factors on one side and the search decisions that marketers make on the other. Aggressive search marketers push their listings higher on the page and invest in different kinds of keywords. Don’t assume increases in CPCs necessarily indicate increased competitiveness in search or decreased performance.
Examining the cost-per-revenue dollar of search marketing against other marketing vehicles on an apples-to-apples basis has led many of our clients to increase their budgets and CPC thresholds as they widen their view of search. Our multichannel commerce clients, ranging from catalog retailers to auto manufacturers to financial services companies, use broader metrics that account for additional value delivered by search, including incremental brand, consumer engagement, and offline revenue value. This approach enables them to manage their campaigns as aggressively as possible. They connect the dots with contact center sales and survey consumers to understand how online research influences in-store purchases.
Overall, progressive marketers quantify what we call the “total search-influenced demand.” One retailer found, for instance, that search drove as much as $7 in offline sales in certain product subcategories (furnishings, for instance) for every dollar of online sales directly attributed to search. Understanding the influences between media and across channels enables a more aggressive investment in existing and new keywords and distribution channels, such as content targeting and pay per call.
Mitigate search costs in other ways
Of course, some marketers may be approaching a point of diminishing returns in search, even using the broadest metrics. At some point every marketer has to evaluate the best place to spend that next dollar. Online pure-play marketers and retailers naturally don’t have the benefit of cross-channel metrics.
Some ways to lower your overall average CPC include:
• Build out the “tail” of keywords with lower click costs and click volume.
• Fully leverage recognized brand or product names in your copy, ad URLs, and landing pages to increase click-through rates and reduce CPCs in the bidding models of Google, MSN, and Yahoo!’s soon-to-be-released Panama.
• Aggressively optimize for natural search traffic. Start with your highest-volume paid-search keywords. Evaluate results with blended metrics that value the synergy in click-through rates and performance you get from both.
• Target search ads to only the most receptive searchers using geographic, demographic, dayparting, contextual, and other types of PPC targeting.
• Collaborate with your best online affiliates—who are often incredibly adept at finding and leveraging market inefficiencies and niches—to increase your search visibility at a fixed cost per action.
Moving away or simply diversifying?
Forty percent of search marketers rely on only Google and/or Yahoo! for search marketing (Jupiter Research, February 2006), so one of the factors at work could be a lack of diversification in the search portfolio. Google accounts for a large amount of the industry’s volume and is simple to use, tempting marketers to put all their eggs in this basket. Entering 2007, the most-effective search campaigns are managed as a portfolio of keywords across an arsenal of keyword-driven online advertising channels.
Many opportunities exist to use search marketing more efficiently. Diversification is a healthy goal for search marketers.
How is your team responding to the continually evolving market dynamics of search engine marketing? Let me know at [email protected].
Cam Balzer is vice president of strategic planning at Performics, the Chicago-based performance marketing division of DoubleClick, and a monthly contributor to CHIEF MARKETER.
Other articles by Cam Balzer:
Search in 2007: The Year of Integration
Search Engine Marketing Does More Than Ever This Holiday Season
Quantifying Online Search’s Impact on Offline Demand
Listen to the Data: Using Search to Understand Your Market
Click Fraud: Three Important Considerations
Four Tactics for Search Optimization Success
If You Build It, They Will Come… If You Attract Them
