The Catalyst

Don’t mess with the paid-search budget, right?  It only represents a small portion of what the advertiser is doing today … and it’s market-driven price seems to be so cheap.  Sound familiar?  It also sounds wrong.

In 2008 some $14B went to paid search.  In two years, it’ll be $21B.  Something like Google Adwords, that looks so cheap and easy on the surface is fraught with problems for the local advertiser.

There is simple logic here that tells us paid-search can do more damage than good for local businesses.  In most cases, the paid-search advertiser will be watching cost-per-lead and ad-to-sales ratios (ASR) escalate.  The numbers don’t lie — it has become expensive.  If anything, simple supply-and-demand tells us it’s only going to get more expensive.

If you’re looking for proof, and there’s plenty more than just the three points below, here are a few things to consider:

1. The Left Side is the Right Side: First and foremost, of the total number of search referrals, paid search accounts for 25% or less from the major search engines, while organic search does the heavy lifting (75%).  In other words, the left side is the right (correct) side when it comes to search.  It’s no mystery to anybody today that it’s more important — and cost-effective — to have a high organic listing than to bog down your cost-per-lead with paid-search.  And it’s no longer as difficult as you might think to get good organic positioning.  Those that disagree with this can continue paying for their competitor’s leads (thanks!).

2. The Niche Premium:  Assume you’re okay with point #1 above.  Here’s another question to ponder: What is the actual search volume on the keywords I’m thinking of buying?  What you’ll find out very quickly is that Google isn’t an 800-pound gorilla, it’s more like 25,000 half-ounce baby monkeys!

The search market is highly fragmented, or “niche”, as some might say.  Is that a good thing?  Well it depends on whether or not you think talking to an audience of 200 is better than talking to an audience of 2,000 … or 20,000 … or 200,000.  Advertisers have been paying a  wasteful premium for niche marketing for ages.  But with search marketing, the higher the volume, the more players are in the game, and the higher the bids rise.  How many keyword combinations can you afford?  (The answer is usually very close to zero.)

3. The illogic of it all.  If I have a good website, meaning my content and traffic are strong, then I really don’t need paid-search.  The organic search process will feed my business, and I can continue to acquire low-cost leads.  Now if my site isn’t that good — if the content is stagnant, if it can’t convert or even identify a qualified lead – why would I want to send more people there?  So I can frustrate even more potential customers?  So I can introduce them to more of my competitors, who by the way, are perched just to the left of my sponsored listing?

Conversion rates from paid search are estimated to be in the 2-3% range.  Just like any average, that 2-3% accounts for the higher-end (which tend to be national or regional sites) and the low-end (which tend to be local sites which have challenges converting leads online).  The math falls apart from this point forward.

This article doesn’t concern the national or regional advertiser who has found efficiencies with paid-search.  Their sites are usually satisfactorily capable at converting  clicks into leads into sales.  As long as their CPCs are low enough (i.e. if they’re very low), they can find customers.  In many retail and service markets, they set the pricing and the locals play along. 

Choosing to ”play along” in a market like this, the local advertiser buying paid-search is bringing a knife to a gun-fight.  And they’ll pay more per new customer than at any time in the history of advertising.

SOURCES: Advertising Age Search Marketing Fact Pack 2008. SEMPO, Compete/TNS Media, et al.

Dave Eckstein is a partner in the firm ESA & Company, based in Red Bank, New Jersey. Dave specializes in highly profitable market share growth for local business and gets a kick out of demonstrating a declining cost of customer acquisition for his clients.