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It's the PPC Search Economy, Stupid!

  |  March 21, 2008   |  Comments

While the economy is volatile, search marketing looks promising. But is it recession proof?

With the U.S. economy in turmoil (if one believes the news) and this being an election year, I'm taken back to 1992 when Bill Clinton's presidential campaign proclaimed, "It's the economy, stupid!" Those of us in PPC (define) search must figure out how the macro economy might impact the PPC search economy. As marketers, we have to be prepared for some volatility -- driven directly or indirectly by economic factors -- in our PPC search campaigns over the next several months.

Marketers aren't the only ones watching PPC search. I get calls from Wall Street analysts fairly regularly, asking about the health of PPC search and online advertising. Often these analysts are looking for clarity on the direction the industry and, more important, the big three search players are going in. More recently, they've been asking about systemic changes in search driven by macroeconomic factors.

No one knows yet if PPC search marketing is recession-proof. Economists only recently concluded that the U.S. has entered a recession. Every week there are news reports of spectacular Wall Street failures; Federal Reserve chairman Ben Bernanke and the reserve board seem to take interest rates to new lows almost weekly.

Consumers seem to be losing confidence in the economy, even if they aren't directly affected by resetting mortgage rates or corporate downsizing. While this may seem to have nothing to do with the wonderful world of SEM (define), clearly one thing that makes search unique is that commercial pure search traffic (not contextual keyword-targeted or behaviorally targeted inventory) is based on the consumer's desire to learn about a product or service, perhaps even to make an imminent purchase. There's no doubt that if consumers decide not to buy because of either perceived economic factors (consumer confidence) or a direct change in their disposable income, it's likely search will somehow be impacted in the following ways, both positively and negatively:

  • Changes in the number of searches. Fewer commercial searches could result in fewer clicks to be purchased, meaning you and your competition will be fighting over a smaller group of searchers. But online shopping could be seen as a discount shopping channel that drives shoppers online at a faster rate than previously expected.

  • Conversion rate changes. One might expect conversion rate changes in both of the above scenarios, either because shoppers are more discerning in their shopping behavior (possibly more price sensitive and shopping around more), there's more aspirational searching (where there's no immediate purchase intent), or even conversion rates increase for advertisers with aggressive pricing and strong brands.

  • Budget-driven changes in the advertiser landscape. Some advertisers set budgets based on a percentage of projected sales, while others use a self-funding direct-response ROI (define) model. In either case, your competition may change budgets rightly or wrongly. Regardless, your bid landscapes will be altered by competitive budget changes.

On a client-by-client basis I've seen volatility on both the supply side (fewer searches and clicks) and on the demand side (changes in budgets or ROI adjustments). However, overall, I still see huge opportunities for my clients. Other SEM agencies and advertisers seem to feel generally optimistic as well, based on my conversations with industry leaders and listening in on investor calls organized by some well-known investment banking research analysts. In addition, data in SEMPO's "2007 State of the Market Survey" looks promising.

SEMPO released the highlights from the survey in conjunction with SES New York this week. I'm lucky enough to be the volunteer on the SEMPO research committee who oversees the survey administered by Radar Research. This year's survey got an even higher response than last year, despite the survey's length and complexity with a total of 867 responding advertisers and agencies.

According to the survey, North American spending on SEM for 2007 was almost $12.2 billion. Paid placement accounted for 87 percent of overall spending, or $10.6 billion, while SEO (define) accounted for approximately 11 percent, or almost $1.3 billion. According to the report's executive summary, released initially to respondents and SEMPO members (yet another reason to join, as we'll be releasing the full report first to members as well):

    SEM is poaching budget from other marketing channels, especially from offline marketing channels. This represents a marked difference from 2005 when budget was shifted mostly from online media such as Web development and affiliate marketing but is consistent with spending in 2006. However, the degree to which certain channels are cannibalized is much higher than in the past surveys. While about a third of advertisers report their funding for paid placement programs and organic SEO came from newly created budgets in 2007 (32 percent and 35 percent, respectively), advertisers are for the most part shifting budgets from other marketing platforms. A third of advertisers report they are shifting budgets from print magazine advertising (up from 20 percent in 2006) and over one in five advertisers (22 percent) are cannibalizing their Web site development budgets. Other channels affected by a shift in spending include direct mail (17 percent), print newspaper advertising (15 percent), and TV advertising (13 percent).

The ease with which marketers can track visible ROI (occurring online, proximal to the search click and on the same computer) and the fact that most marketers (76 percent) measure conversion rate and use that data to justify spending, it's no surprise to me that niche, highly targeted, and direct mail are losing their budgets to search, much more so than branding media, such as TV and radio.

This measurability and the fact that marketers are measuring for the most part bodes well for search's future, assuming there are searchers clicking and buying. Even more encouraging is that marketers clearly want to learn how to measure search's branding impact, a topic I discussed this week at SES NY. We may be in for some bumps over the next months or years, but the smart marketer understands that all that yet-to-be-measured branding lift in search should provide a strong justification, along with ROI for continued support for PPC search as a channel.

In future columns, I'll cover the SEMPO survey results, which yield much robust data that merits further in-depth coverage.

Want more search information? ClickZ SEM Archives contain all our search columns, organized by topic.

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ABOUT THE AUTHOR

Kevin Lee

Kevin Lee, Didit cofounder and executive chairman, has been an acknowledged search engine marketing expert since 1995. His years of SEM expertise provide the foundation for Didit's proprietary Maestro search campaign technology. The company's unparalleled results, custom strategies, and client growth have earned it recognition not only among marketers but also as part of the 2007 Inc 500 (No. 137) as well as three-time Deloitte's Fast 500 placement. Kevin's latest book, "Search Engine Advertising" has been widely praised.

Industry leadership includes being a founding board member of SEMPO and its first elected chairman. "The Wall St. Journal," "BusinessWeek," "The New York Times," Bloomberg, CNET, "USA Today," "San Jose Mercury News," and other press quote Kevin regularly. Kevin lectures at leading industry conferences, plus New York, Columbia, Fordham, and Pace universities. Kevin earned his MBA from the Yale School of Management in 1992 and lives in Manhattan with his wife, a New York psychologist and children.

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