Ben Charny at MarketWatch published an article today entitled: Some Google advertisers cutting spending: Keyword inflation, low conversion rates sending merchants elsewhere. Consider this more fodder for my argument that advertising on Google is an exponentially diminishing ROI and you need to have a strategy for how to handle it.

Ben writes: “Frustrated by the soaring price of Internet-search advertising and diminishing returns from the ads they buy, mid-sized advertisers say they plan to reduce how much business they do with Google this year — in some cases, significantly.”  Its true, clients I speak with are looking at shifting dollars away.  Not all but some.  “…Google’s expansive advertising network and its No. 1 Internet search engine still make it a necessary part of any online campaign. Saying goodbye to Google and its huge audience is a risky move for advertisers.”

But Ben also argues that prices are being driven up as a result of new bidders entering into the mix.  This may be partially true.  When you bid on a keyword, the price does go up during the course of a finite period.  But obscure keywords don’t necessarily go up as fast.  That is unless they are performing well for you.  It can become very clear that keywords that are not demanding competitive bids can increase in cost when you are getting results.  Google has some kind of algorithm in place to incrementally charge more money to an advertiser that is performing well in addition to the auction system that invites competitive bidding between advertisers.  So the ROI to advertiser on Google diminishes with successful effort.  They charge more money when you do well.

This is why advertisers are reaching a point where they are deciding to decrease the allocation of their spend on Google.  Over the last year or two spend on Google has grown per advertiser.  Energy and effort has increased and they have become incrementally more strategic and successful at generating results from those campaigns.  Now things have reached a tipping point and the results are becoming more expensive and the ROI is decreasing with the enhanced spend.  So the reaction is to decrease the spend.  But that is not going to likely change the ROI.  Google has upped the anti.  Now they are going to see a withdrawal from advertisers.  How significant?  2007 will tell.

Ben’s article notes: “If enough of those companies curtail their Google spending, it could begin to depress the company’s annual revenue growth rate, which is already expected to slow to 47% this year from 80% in 2006. That growth rate is one of the primary reasons that Wall Street analysts cite to justify their price targets on Google shares.”  Look out investors.  When tipping points happen, the fallout can be far-reaching.  And the tipping point for ROI-attainment on Google has past.

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