Paid Search Advertising: The Tipping Point and Rising CPA

Well it is official.  I am now hearing a consistent theme from advertisers and agencies.  There is such a thing as too much of a good thing.  Paid search has evolved into the fastest growing online advertising medium with spend in excess of $8B this year and the ceiling is expected to bump up to $10B next year.  Advertisers have found – especially direct responders – that search advertising generates a great steady stream of leads.  Common knowledge.  Agencies, however have found that the costs associated with managing paid search is increasing – causing a drain on the bottom line for the agency.  But the real problem is that there appears to be a Tipping Point in paid search.  Search is rearing an ugly side, a side that is proving to be less cost-effective and perhaps even down-right expensive.


What am I talking about?  Paid search is all about the cost-per-acquisition right (CPA)?  What does it cost me to buy a lead?  What does it cost me to buy a lead by buying a search term?  How about 2 terms?  Okay, how about 5,000 terms?  Let’s say I spend $5,000 in the first month and things go very well so I up my budget to $10,000 and things do better.  The CPA for a lead went from $20 down to $18.  It’s like Vegas, so I up my anti.  This is how it has been for a lot of advertisers.  So the budget get’s increased this time $50,000.  And off we go….


Along comes SEM (search engine marketing) and bid optimization tools and people go hog wild.  Now the bidding process is automated so that search terms get purchased more quickly and at optimized pricing.  Now a buyer can bypass the search engine’s interface (like Adwords for Google) and set up bulk buys.  Furthermore, the SEM optimization tools can be leveraged to auto-bid for placements and the buy process is effectively streamlined.  The result is that for $75,000 the CPA drops down to $15 – wahooo!  So now the budget gets increased to $100,000. 


Next he advertiser starts shifting dollars away from other media and starts pumping money into paid search because it is working so well.  Meanwhile, the agency is smoking like an overworked engine.  The keyword list is up to over 20,000 terms and the buys are simultaneous across Google, MSN and Yahoo!  Terms are changed daily – sometimes intraday – and reports are run every morning.  Click fraud appears – when the clicks reported by the search engine are higher than those received by the client – but it’s within 10% so we consider it acceptable (what?!?).  The agency has to put at least one FTE on the job just to manage the search campaign for this one client.  No longer is this a profitable situation for the agency.  Unless of course it is an agency that specifically specializes in search (like a 360i for example) in which case they have dedicated search campaign managers.  That is not the case for most traditional agencies, which at this stage are burning margins like candle wicks.


Anyway, then something mysterious starts to happen.  The client bumps the budget again and the CPA – which was hovering at $15 – comes up to $16.  At first nobody thinks much of it.  The next month, however, it’s at $16.50.  Slowly, over the course of the next couple of months the CPA starts to rise by fractions of a dollar until and, after about 6 months, it is back to nearly $20.  What’s going on here!?!?!


Paid search has a Tipping Point.  It is the point upon which the search engines – specifically Google – appear to target something, an advertiser maybe or perhaps just certain terms, and they inch up the rates.  So now the terms that have always worked well for an advertiser start to become more expensive.  I don’t presume to know exactly what it is that is causing the creep but it is consistent and obvious.  Big block retailers, direct response advertisers and hard-core CPA-advertisers alike are all beginning to report that paid search is becoming more expensive.  Maybe more and more people are buying paid search and that is driving up the bidding on the most common terms, but it doesn’t quite add up.  Even if that is it the explanation it is still a problem.  The CPAs for paid search are rising steadily for those who have been at it for a while.  Exactly that.  It all goes well at first and then it changes.


So what happens now?  Do you keep the budget at $100,000 when the CPA is back up to $20?  What if it keeps rising?  That’s what you were getting when your budget was $5,000.  Most advertisers are finding themselves stuck somewhere at or near this quandary.  The CPA is rising and the budget requests for search are still out there, only now they can’t be substantiated like before.  What do you do?!?


The conversations that I am having with agencies and advertisers include this search Tipping Point and this phenomenon is real and relevant.  People want to know if this is happening just to them or if it is a trend.  It is a trend!! 

So now what?  Now is the time to look at other ways of driving effective online advertising that are also response-driven.  Now is the time to re-consider effective targeting solutions that were once written off or overused (dare I say abused) and see if they can be put to good use again.  Tried and true online advertising techniques that deliver effective results need to be put into back into practice.  Remember the ad banner?  It’s still there.  Have you abandoned it for search?  Bet you did and you don’t even feel bad about it.  I am not saying go buy a bunch of display ads.  I am also not saying go buy a bunch of network CPA buys.  Besides, if you are an effective media planner you probably already have both included in your plan – diversification right?


What I am recommending is that you go back to the basic technologies and see how you can reapply them.  Ad serving technology is malleable.  It can be utilized to do other things.  For example it can be leveraged to serve dynamic, rich content.  It can be leveraged to identify and recognize individuals.  It can do a lot more than simply serve an ad on a page.  Try exploring technologies that have been repurposed and see what they can do for you and your client. 

Can you recognize and re-target customers?  I know I talk about that all of the time.  But what about leveraging your client’s CRM database for recapture marketing?  You can be just as good at generating recurring revenue opportunities as you are at generating new opportunities for your client.  Obviously you are not about to abandon the new-prospect-generating role that you fulfill, but diversification right?  Leverage the technologies out there to drive your net CPA back down. 


You can still do search.  Balance it out with re-targeting solutions that will drive recurring revenue opportunities as well.  Convince your client that you can take responsibility for generating both sets of results and the net CPA will be lower as a result.  You have the ability to deliver new and existing customers simultaneously and that is one way to overcome the search Tipping Point.  Because it is a creaper.

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