Paid search is too cheap!

Or: why AdWords prices will keep rising

I was at the Dutch Search Marketing Congres yesterday, quite a nice day and I had some fun talking to other people in the business. One thing annoyed me though: some folks kept whining that AdWords was getting more expensive every year… What annoys me most is this: someone will come up to me, we’ll talk a bit, and he’ll tell me that offline he pays € 80,- for a lead, and using AdWords their cost per lead is € 12,-. He was profitable with both, but of course he preferred the AdWords leads.

After telling me that, and me congratulating him on his nice way of using AdWords, he starts complaining that AdWords prices keep rising… Now, if you can be profitable with a cost per lead of € 80,-, chances are, someone else can too. So someone will start bidding more for the same keywords, getting a cost per lead of € 14,-, and still make money. You will start bidding higher, etc. etc. etc. get it? You know what that’s called? Economics…

If you can’t make a profit from it anymore, and someone else can, you’re doing something wrong. That’s why you shouldn’t just throw money at AdWords. You have to digg deeper in your stats: how much clicks do you need to get a new client, where are you losing people that come to your site etc. etc. If you’re the best at doing that, you’ll find that in the end you won’t mind paying more, since you’re still making a profit. If you can’t do that optimisation yourself, hire someone to help you with it. In the end, it will earn you money.

That’s the principle of a free market economy: people will keep entering the market, until just costs are covered, an no profit is being made any more. The message: get in to AdWords while it’s still cheap, have fun with it, and learn from it. But don’t whine about prices going up, as long as you’re still making a profit from it.

Note: I’m not the first one to say this, Danny Sullivan has been saying that search is underpriced for quite a while, as you can see on this report on SE Roundtable, amongst others.

[tags]adwords, google[/tags]

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2 Responses

  1. Peter van der GraafBy Peter van der Graaf on 2 February, 2007

    For most people it is hard to set a correct cost per lead because their administration doesn’t give them enough insight on what a customer (lifetime) is really worth and what they really cost. They guess how much they can spend on acquisition, but they need a prety big margin for error. Therefor bidding closer to the real value is risky for them. Companies with better understanding of their earnings and costs can safely bid higher than ones with poorer understanding.

    The biggest problem with keyword bidding systems is the over usage of broad matching options. Because of crappy SEA work, companies automatically bid on many irrelevant keywords because they’re included in the broad match. When the bidprice for that broad keyword is high, the long tail automatically becomes more expensive as well.

    My tip to Google: Make the quality score much lower for broad matches than for exacter ones. This way the long tail remains cheap.

  2. Joost de ValkBy Joost de Valk on 2 February, 2007

    Agreed on that one, setting negative keywords correctly is at least as important as choosing the right “positive” ones.