Will Click Prices Continue to Rise?

At the Search Engine Strategies conference this week in New York, there was a lot of buzz around the direction of pay-per-click (PPC) prices. The consensus is prices are high — and will probably go higher.

There’s clearly a lot of anxiety about current prices; many marketers are already at their maximum level of discomfort, given the return on investment (ROI) or conversion metrics they’d like to hit for campaigns.

With Google’s, Yahoo’s, and FindWhat’s stock prices bouncing all over the place lately, marketers might feel the PPC marketplace could become as volatile as search stock prices. Ironically, a key driver of stock-price volatility has been that PPC prices in some industry categories cooled a bit in January, according to the search engines. When this information was released last week, all the major search engine stocks nosedived.

This seasonality wasn’t a surprise to those of us who watch or manage accounts for many large advertisers. It happened last year and will likely happen again next year. We also know within some industries, PPC prices didn’t drop and all reductions will likely be temporary. And we know most marketers haven’t yet factored in valuable attributes of search traffic that are only just beginning to be measured and quantified. This means marketers are making current bid-price decisions (or their PPC campaign management systems are making the decisions) based on the likelihood every clickstream will convert in the short term.

Seasonal conversion escalation is a fact for all e-commerce and holiday searches and for the keywords associated with those searches. The likelihood a search will convert into a verifiable, trackable, near-term purchase increases every year. During the holidays, a greater percentage of searchers were ready to buy, even those searching on generic terms. The conversion lift sent CPCs (define) higher in certain categories. Some categories represent a bug chunk of overall Q4 traffic. Come January, conversion patterns returned to “normal.” If marketers were to hit specific ROI targets based on current measurements, bid prices had to fall.

In the long term, several factors will certainly result in continued CPC price escalation. If some of the following factors apply to your industry, expect PPC prices to rise in your future:

• Your sector has several major players all fighting for market share.
• Lagged conversion behavior hasn’t yet been factored into bidding/price decisions by most of the competition.
• A lifetime value component can be applied within the industry. So if loyal customers can be acquired via search engine marketing (SEM), that factor can be applied rationally to campaign strategies.
• More than three of the major players in your industry have a nationwide presence, including brick-and-mortar locations (a brick-and-mortar presence allows the marketer to bid more, due to the high percentage of offline conversions occurring after search behavior).
• Several top marketers test ad copy or rotate copy based on seasonality.
• One or more of your competitors test landing page.

All these factors result in bid escalation over time. If the competition engages in more sophisticated bidding strategies and applies conversion-enhancement best practices and you don’t match them, you’ll be left behind. A recent SEMPO research study indicates advertisers plan to increase SEM spending 39 percent on average in 2005.

That may sound dire, but when there’s a valuable commodity (search traffic) and one bidder can make better use of that commodity, that bidder has an advantage.

Ironically, as marketers increase conversion the primary beneficiaries are search engines and consumers, not marketers. The engines make extra cash as bid prices rise, and consumers get better user experiences. Marketers will find themselves in an arms race that’s not optional. Those who stand still will be left behind.

If you want to stay engaged in the search war, you must position yourself as a winner. Marketers will be forced into a brutal, real-time auction marketplace for search traffic. The marketer able to maximize the clickstream’s value will be one of only a handful of winners.

Do you want to be the brilliant marketer at the top of the ever-more expensive search results or accept defeat? The only other option is to act like a lunatic and spend wantonly. Either way, click prices will rise over time. The question is, how quickly? The answer is different in every industry sector.

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