The New Imperative for Search Marketing: ROI Measurement
Written by Steve Latham, CEO of Spur Digital
Introduction
The secret is out - search engine marketing should be an integral part of every company's integrated marketing program. Growing more than 30% annually, search engine advertising affords companies of all sizes the opportunity to reach targeted audiences in a cost-effective and measurable way. It's no surprise that search advertising comprises more than 35% of online ad spend today.
While Search Engine Marketing has been a boon for many companies, its increasing popularity is adversely affecting companies that spend heavily on search ads. What is alarming is that most companies have not realized this. As the popularity of search engine advertising increases, the relative benefits diminish. Unless companies understand the factors that influence Return on Investment, they are most likely wasting money on unprofitable search ads.
Compelling Advertising Medium
Search ads, known as "sponsored links" on search engines such as Google, Yahoo, MSN and AOL, offer several compelling advantages over traditional advertising channels. Unlike print, television, and even online banner ads, search ads deliver a targeted message to a prospective customer at the very moment they are looking for your product or service.
In addition, online advertisers charge companies for search ads on a cost-per-click basis. So a company pays only when a prospect clicks on the ad, not when the ad is served. The CPC pricing model is unique to online advertising and is favored by those who prefer to pay for results, not just impressions.
Moreover, the price of a search ad is based on auction-like bidding (similar to pricing on eBay). The more popular the search phrase, the higher the cost. As one might expect, the cost for search terms varies substantially, ranging from $0.10 per click for a relatively obscure term like "glass carrier" to more than $50 per click for terms that have high profit potential such as "mesothelioma attorney" (mesothelioma is a cancer linked to asbestos).
Search Ad Price Increases
Market researcher Nielsen/NetRatings reported that the growth of Web search traffic will slow in the coming years. At the same time, search ad spending will continue to grow rapidly. Increasing demand for search terms, combined with a limited supply of ads and a competitive bid price structure, can only have one result: rising cost of search ads.
Online publisher ZDNet reported recently that on average, search Ad costs have increased 50-75% over the past 24 months. In competitive markets, prices have increased 300-400% in the last 12 months. Given that search advertising is still in its infancy, it's a safe bet that search ad prices will continue to rise as more advertisers bid for top placement across the board.
Reduced Conversion Rates
What is less obvious but of equal concern is that increased competition also impacts customer conversion rates. As prospects have more and more options from which to choose, they are more likely to browse back and forth, seeing what each advertiser has to offer. For example, when a search results in two sponsored links, each site has a 50% chance of making a sale. But when five or six sponsored links are presented, prospects are more likely to browse back and forth to compare prices, features, etc. In general, the more competitors there are, the lower the chance of making the sale. So while advertisers may pay for the same number of clicks, they will likely see fewer sales.
The net result is that while search ads make sense where prices are low and competition is limited, they become less attractive when prices rise and competition increases. A small change in cost per click and conversion rate can make a search ad unprofitable. Consider the following example:
ABC Co sells $30 tools that have a $6 gross margin. When ABC began placing search ads, the cost was $0.40 per click and the conversion rate was 10% (1 in 10 visitors bought a tool). So ABC spent $4.00 (10 clicks x $0.40) to earn $6.00 (1 sale @ $6), generating a ROI of 150% ($6 ÷ $4). But as competitors started advertising on search engines, Ad costs increased to $0.60 and ABC's conversion rate fell to 8%. ABC now spends $7.20 (12 clicks x $0.60) to make $6.00, resulting in a loss of $1.20 per sale. At $.60 per click, this ad is no longer profitable.
The Need to Measure ROI
In managing Search Engine Advertising programs for our clients, we've seen several cases where competitors were spending more to acquire a customer than they could make from the sale to that customer. In these cases, we had no choice but to stop buying keywords that were above our threshold of profitability. But the key to this strategy is being able to measure the cost and conversion rates for each search term. Without these data point, we'd be spending money blindly on unprofitable terms, as most companies are doing today.
The Need for Disciplined Search Ad Management
Because small changes in cost and conversion rates have a dramatic impact on profits, companies must track and measure ROI from search ads. While this may seem obvious, very few companies are able to do it, as it requires technical resources and web marketing expertise that few companies have. Consequently, most continue to spend heavily on search ads, unaware that they are often losing money on unprofitable ads.
Net, net: ROI measurement is a must. If companies know which ads are profitable and which are not, they can boost profits by allocating their ad spend to those keywords that are the most profitable. Early adopters do this today, but they are a very small segment of the market. Over the next 18 months, we believe more and more companies will implement ROI measurement systems. Those that do will continue to reap value from search advertising. Those that don't will learn a very expensive lesson: you can't manage what you can't measure.
Steve Latham is the founder and CEO of Spur Digital, a leading full-service interactive agency based in Houston, Texas. Since founding Spur Digital in 2002, Steve has developed and executed online marketing strategies for leading companies of all sizes. To learn more about Spur Digital's online marketing services please visit www.SpurDigital.com