SEMPO Research Breaks Down 2005

Recently, the Search Engine Marketing Professional Organization (SEMPO), the nonprofit trade association for the SEM (define) industry, released its second annual state-of-the-market survey. The survey is too comprehensive to cover in one column, so I’ll refer to findings over the next several months, as Radar Research, the firm responsible for the survey, continues its data analysis. Today, I’ll provided an overview of the top-line research results and cover how these results might affect search marketers.

The big news is the estimated North American SEM spending for 2005 was $5.75 billion. As expected, most SEM spending is allocated to paid placement, which accounted for 83 percent of the total overall spending, or $4.7 billion. Since most of the PPC (define) spending ends up in the coffers of publicly traded search engines and portals, it’s easy to see why Google’s market capitalization is currently hovering in the vicinity of $139 billion. Google, Yahoo, and Microsoft’s MSN don’t always break out revenues from search, contextual, and media in their public financial statements, but clearly search is a strong, rapidly growing segment.

Four out of five advertisers report they engage in organic SEO (define). But, unsurprisingly, spending isn’t commensurate in organic and paid placement, since the appeal of organic SEO is cost and efficiency. Organic SEO accounted for approximately 11 percent of overall spending, or about $632 million. Organic SEO spending was calculated by looking at outsourced costs for SEO/SEM agencies and consultants and including data collected from marketers about in-house staff and resources allocated to SEO. SEO will likely continue to be a much smaller percentage of spending than paid search advertising in the same way PR spending is dwarfed by media spending, even though PR is a critically important aspect of most integrated marketing plans. SEO professionals and agencies will be increasingly busy as more marketers recognize SEO’s importance.

Paid inclusion, having fallen into disfavor among many marketers and offered by only a few search media firms, accounted for just 4 percent of overall spending, or about $246 million. Paid inclusion’s continued viability depends on several factors, including:

  • Yahoo’s share of search query volume (which is holding steady).

  • Yahoo’s screen real-estate allocation between algorithmic search and paid placement results (Yahoo seems to have been favoring PPC results to algorithmic results for more searches).
  • Government regulation or FTC labeling requirements for paid inclusion links. Currently, because the algorithms governing the paid inclusion feeds are supposed to be agnostic between naturally crawled results, paid inclusion crawls, and XML paid inclusion, there’s no labeling requirement for paid inclusion.

In general, most paid and organic search spending seems to originate from within a marketing budget, meaning other media lose share as search gains it. This budget movement is surely due to both marketers recognizing search’s value as the “perfect prospect” and to media consumption changing over the last several years. People spend much more time online, and media dollars tend to follow eyeballs.

This media shift has a several-year lag time due to media plan inertia and a higher burden of proof for the new gaining media type. For some reason, old media, for which there is little data supporting effectiveness, are grandfathered into the media plan, while newer media are scrutinized. Could it be it’s far easier for an agency to purchase the same media than to adapt to the challenging world of auction-based media?

Marketers and agencies once again put branding as one of their top reasons for engaging in SEM. Sales, leads, and traffic are the other top choices. Part of CPC (define) escalation in some industry sectors might be attributed to marketers allowing a higher cost than could be justified through immediate ROI (define) measurement alone. Therefore, branding may be the excuse used by marketers seeking to keep up with more aggressive competitors.

However, marketers’ and agencies’ willingness to continue to pay more wasn’t as pronounced as in last year’s study, leading Radar and SEMPO to believe some marketers are reaching a maximum pain point. This will undoubtedly drive a robust market for expertise and testing, as the only way to afford a higher CPC is to improve campaign efficiency through click path optimization and offer testing. If your competition completes testing that improves conversion rates, increases order sizes, or otherwise generates a more profitable user visit from search clicks, you can expect the advertiser to bump up bids to maximize scale in its campaign’s newly efficient segments.

The grueling PPC auctions and ever-changing search algorithms may be the source of some dissatisfaction that some marketers expressed with their agencies. The study indicates some marketers are skeptical that their SEM agencies deliver sufficient value. For agencies to maintain their place in the SEM ecosystem, they must prove their value in comparison to their costs. This holds true for all on- and offline advertising agencies. Marketers will continue to evaluate how to best profit from the wonderful, vibrant SEM marketplace.

Stay tuned over the next several months as additional survey data analysis is completed. I’ll be providing my perspective on the results.

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