Paid search is successful because it's a self-generating pool of highly targeted inventory that converts very well. But why doesn't it work for brand advertisers?
Inventory across all advertising types can be sorted into three classes:
Note that budgets for companies that spend a lot of money on advertising are typically designated to the first, second, and third categories -- in that order.
In the inventory hierarchy, high-performance DR inventory will always sell out first, and at high CPMs. Any advertiser's DR budget is spent to the maximum available pool of inventory, but there isn't enough inventory in existence that works well for DR at high CPMs. The rest of the DR world exists in inventory that's very low value, bought at low CPMs based purely on very careful ROI analysis.
What many people, even in the advertising industry, don't realize is nearly every company that can make use of direct marketing will spend as much money on direct marketing inventory in the first category as is available to them. As long as the media buy has positive ROI (define), they'll spend an unlimited amount of money on as much of this inventory type as they can find. Since inventory is limited, most companies can't drive all their sales in this channel and, therefore, must spend money on other advertising forms. Most companies go after a mix of brand and inexpensive DR inventory to drive additional sales.
Because high eCPM DR inventory has low supply and is in high demand, its eCPM is nearly always optimized by the market. Paid search companies optimize it further by selling their inventory via real-time auctions, which dynamically optimize inventory yield on their behalf (Google always makes the most money it can for each keyword.)
This inventory type includes highly qualified, targeted mailing lists or leads. Typically, these mailing lists or sales leads are generated as a result of request for information (RFI) cards (those little cards in magazines that you rarely fill out) or people who specifically asked to be contacted by salespeople. Companies like LendingTree exist because they collect contact information from people who are looking for mortgages and sell those leads to mortgage companies. This leads to highly qualified lists of people looking for mortgages, which tends to drive high eCPM for the company that owns the inventory.
Paid search has been successful because it's a self-generating pool of highly targeted inventory that converts well because the audience is far down the sales funnel and the audience self-identifies their interest. If you're searching for a type of car and your search is very granular, such as "seven-passenger SUV," most companies trying to sell cars that match your search query will pay a lot for the resulting paid search inventory.
But highly targeted keyword groups are rare, so they tend to be expensive. And since most companies only have a few products or services, a vast number of advertisers are needed to drive up prices due to competition. This is the magic created by the paid search space. High-yielding inventory for the publisher, high eCPM payouts by the advertiser, and very relevant advertising for the consumer are a winning combination and a new channel of granular, targeted inventory.
While search engines typically sell out their inventory at a high eCPM in aggregate, few customers spend a lot with them. Most advertisers spending on paid search are small businesses that don't use any other advertising form. Companies like eBay and Amazon are among the few with vast numbers of products to attach to a vast number of keywords. And while these companies are among the search engines' largest customers, they typically represent only a small percentage of the engines' revenue.
This is very different from what we see in high eCPM brand inventory. In this inventory class, an advertiser can spend a lot of money to reach a large audience in a very efficient manner. The types of inventory in this category are owned by the largest media companies and are typically bought and sold in a relatively high-touch process.
The huge existing pool of brand advertising dollars simply can't be spent in search. There isn't a way to buy a large enough audience. There isn't enough brand-driving quality (text ads aren't nearly as memorable as video or rich media). And there's simply too much friction in paid search to let a brand media buyer capture a large relevant audience. This, of course, is the desire of most major ad spenders: to hit a large relevant audience, with emphasis on "large" first, "relevant" second. They simply can't spend large amounts of money on paid search efficiently enough -- and they don't get a big enough brand benefit from that inventory as it is.
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