Search engines' positive results drive price wars

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While the rest of the advertising industry was in the doldrums last year, something amazing was happening in the pay-for-performance search-engine sector: Spending was up, and competition was fierce.
Advertisers, recognizing the value in pay-per-click and pay-for-placement search-engine marketing, launched an all-out offensive designed to capture potential customers. The reason was simple: Pay-for-performance advertising pays off, said Matthew Berk, a senior analyst with Jupiter Research.

"The paid search model is proving itself by working," Berk said. "It captures the users’ attention at literally their moment of need and in a context that’s relevant for them. Advertisers are seeing real value for their spend."

There are several types of pay-for-performance advertising. The most visible—and most used—is pay-per-click search engine advertising. In this form, marketers bid on specific keywords. When a user goes to a search engine and types in that keyword, a link to the advertiser’s Web site is prominently displayed as either a sponsored link or as a weighted result in a search field. The more an advertiser is willing to pay, the higher in the rankings its company appears. One feature of this type of placement is the fact that unless someone clicks on your link, you don’t pay a cent.

There are two ways to purchase pay-per-click placement: going directly to a search engine (such as, which offers Google Ad Words) or going through an aggregator (such as Overture or Looksmart), which provides search results to content sites all over the Web. In addition to these three companies, there are hundreds of pay-for-placement engines and search providers, Jupiter’s Berk said.

Paid inclusion, another pay-for-performance option, is a slightly different format. Here, your only guarantee is that the search engine’s crawler will search your entire site, cataloging it based on the engine’s parameters. Because there’s no assurance that your site will get a certain placement, this option is less popular with marketers.

Brad Mehl, senior marketing director with Martindale Hubble, which provides legal information through Web sites such as and, uses pay-per-click as one piece of his company’s aggressive online marketing campaign. The company has alliances with AOL and It also uses more traditional impression-based marketing. Mehl sprinkles his pay-per-click advertising budget over a handful of sites, including Overture and He reported that the method achieves significant results.

"We’re building a sustainable rise in traffic," he said. "Although I can’t give you exact numbers, we’re definitely seeing a return on investment."

A changing market

But marketers who use pay-per-click campaigns are facing a changing marketplace.

A year ago, pay-per-click was on the radar, but many companies were holding back, taking a wait-and-see attitude. Currently, however, those cautious advertisers are leaping into the market, driving per-word fees and bids up and pushing some companies out of the mix and toward smaller providers.

For example, a company bidding on the phrase "debt consolidation" at Overture can expect to pay $13 every time someone clicks on its link. Even smaller search providers, such as, have the phrase listed at $1.13. Words such as mortgage, insurance, multilevel marketing and even lawyers are out of reach for many advertising budgets.

"[There is] definitely some exorbitant bidding that’s going on that we do not participate in," Martindale Hubble’s Mehl said. "We have to do what’s cost effective; we just don’t participate in bidding wars."

Search companies say pricing is set by the demand, and many seem to be taking advantage of this seller’s market. For example, Overture in February doubled its minimum bid from 5 cents to 10 cents. As a result, some of the smaller companies that had embraced pay-per-click marketing are slowly being phased out in favor of larger corporate customers, said David Hallerman, a senior analyst with research firm eMarketer Inc.

"Originally, we saw more small and medium-size businesses using the medium," he said. "Now, we’re seeing larger businesses finding the benefit."

The entry of big business into the pay-per-click market is driving another change. Search providers are being forced to add improved customer service. After all, if customers are paying higher fees for placement, they want to be sure they’re getting what they pay for—a way to monitor return on investment. Overture moved in that direction with its January acquisition of Keylime Software, which develops and sells analysis tools. Also, several search engine campaign management services are popping up.

Some customers aren’t waiting for search providers to prove that key words are driving traffic. Orit Livnat, marketing manager for Radirect Inc., a telecommunications equipment provider, said her company is implementing NetIQ Corp.’s WebTrends, a Web analysis program, to analyze its ad spend.

"We’re using, and we see that they are driving traffic to our site. But we want to track the clicks once they get to us so we can track a campaign to an action," said Livnat, who also uses’s and Overture’s services.

Still, the preliminary results point to success, even as prices are rising. Livnat’s campaigns are so successful that her pay-per-click spending is up significantly since last year.

"I’m spending six times as much now as I was in January of last year. You can’t beat the distribution, although I have cut down spending on certain keywords," she said.

Radirect’s experience is typical, and most analysts and search company executives say demand for these services will continue as long as clicks keep bringing in new customers.

"The sector will continue to grow and provide returns," said Jupiter’s Berk. "But we will see a change. People will get smart about making more diverse choices in their keywords. They’ll see that there may be 50 other keywords that you can get for next to nothing that will bring them as much or more traffic."

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