It's no secret that the golden age of dirt-cheap search terms has passed and that we're now in the era of steadily rising search term prices. Although for many advertisers paid search still pays off, returns on investment are diminishing and some retailers have cut back on paid search budgets.
"In the early days we were bidding 10 cents, probably a dollar 18 months ago and now $2.50," said Whitney Anderson, chief executive of Mother Nature Inc., a natural products e-tailer.
The company's ROI has dropped for terms it's been bidding on for four to five years, especially following Google Inc.'s (GOOG) IPO, when an influx of new advertisers saturated the market, said Anderson. Even some second-tier search engines have raised minimum bids from 5 cents to 10 cents - enough toaffectexpenses. So the company decided to freeze its paid search budget early this year at somewhere north of $1 million.
"The absolute number is set," said Anderson, "and not growing as fast as the rest of our ad budget."
Even eBay Inc. (EBAY), one of the biggest paid search advertisers, is feeling the effects of price increases. Bill Cobb, president of eBay North America, said at a meeting with financial analysts last month that the company was surprised by key word prices and viewed current pricing as being "a little wild." The auctions company is watching prices closely.
"If the ROI isn't what we're expecting, it doesn't matter what the marketing program is," eBay spokesman Hani Durzy told Online Retail Report. "We'd pull back."
The rise in key-word costs has put more pressure on the margins of e-commerce companies like eBay and Amazon.com Inc. (AMZN), said analyst Mark Mahaney at American Technology Research. "They've had a tremendous bargain over the last couple years," he said, "and now more people have come in and found out about the secret of search advertising."
Retailers in particular are in a tough spot, as their returns on paid search have already equalized with their returns from other kinds of online marketing, said Niki Scevak, search engine marketing analyst at JupiterResearch.
Advertisers in other sectors are just finding that ROI for other kinds of marketing, such as rich media or banner ads, are nearing the returns for paid search. But retailers, along with financial services and travel advertisers, hit the wall in the past year, according to Scevak.
"There would have been undiscovered keywords in the past that gave marketers an excellent ROI," he said, "but those keywords have largely been discovered and bid up their fair value."
Keyword prices rose between 15% to 25% in the last year, according to Matt McMahon, executive vice president of corporate development at Fathom Online Corp., a search marketing firm that tracks keyword prices. Among industry sectors, terms for retail had one of the biggest price increases in the fourth quarter, up 82%, from an average of 32 cents in September to 58 cents in December.