Budgets, Branding and the State of Search

Search engine marketing was a $9.4 billion budget item for North American companies last year, according to the latest edition of a report issued annually by the Search Engine Marketing Professional Organization.

The figure represents a 62% increase over the $5.75 spent on search in 2005, according to findings in “The State of Search Engine Marketing 2006”. Like the earlier surveys, this one was conducted for SEMPO by Radar Research LLC and Intellisurvey. The survey polled 587 search marketers in both agency and in-house posts to compile its data and was conducted in November and December 2006.

Of the budget for search marketing last year, about 86% or $8 billion went into paid search, the report found. Optimizing Web sites for natural search rankings accounted for $1.1 billion, or 12% of total spending. The previous SEMPO industry survey found that 83% of spending went toward paid search and 11% into SEO in 2005.

Spending on paid inclusion continued its decline, dropping from $246 million and 4% of spending in 2005 to only $94 million or 1% of the total search budget last year. Search technology platforms comprised the remaining 1.3% or $122 million.

But those spend shares don’t reflect the popularity of the tactics. The report found that three-quarters of respondents practice SEO, while slightly lees (71%) practice paid search, and one in five said they engage in paid inclusion.

Those proportions may continue to prevail, says Kevin Lee, co-founder and executive chairman of search marketing firm Did-It and a member of the SEMPO board of directors.

“I think that ratio is going to continue to be the case, primarily because organic SEO is like public relations, in that throwing more money at it doesn’t necessarily increase your results,” he says. “At some stage, you reach a point of diminishing marginal returns.”

In terms of search channels used, Google AdWords continued to dominate, with 96% of respondents saying they paced ads there. Eighty-six percent of those polled said they used Yahoo!’s PPC platform. MSN saw a hefty increase in usage, from 29% of respondents in 2005 to 68% in 2006.

Lee says one of the most arresting findings in this year’s study was the finding that 51% of those polled said senior management were getting “very involved” with their SEM programs.

That heightened C-level interest in search may help explain why growing numbers of respondents reported that their companies are creating new budgets for search marketing (36% for paid search, the same for SEO.) And those companies that are shifting marketing budgets around to fund new search campaigns are taking the money mostly from offline efforts, not other digital advertising. Twenty percent of respondents said their companies were poaching from print advertising to underwrite SEM: 16% moved funds from direct mail. True, 15% said they were taking from the Web-development line item to pay for search. But 13% respectively said they were cutting back on TV and newspaper advertising.

“Once senior management starts to take an interest in search, it’s no longer the other interactive channels that take the budget hit, moving funds around from banners or rich media to paid search or optimization,” Lee says. “The corporate media planners start asking if they really want to pour as much into newspapers or TV. If people are getting more of their news and content online, they think about moving their general online marketing budgets higher—and search is a piece of that.”

As in past years, respondents were asked to list the multiple objectives for their search marketing efforts. In past years, the majority of advertisers cited brand awareness as the number one goal, with direct sales in second place. This year direct-response marketing won out over branding as the reason for doing SEM, albeit by a slim margin of 58% to 57%. (Forty-seven percent named lead generation and 42% Web traffic as other reasons for marketing through search.)

“It’s a healthy trend that direct sales is becoming a primary reason for [search engine marketing] spending,” said SEMPO research committee co-chair Gordon Hotchkiss in a release accompanying the report. “The SEM industry is under pressure to show [return on investment], and linking spending to direct sales will prove that SEM can contribute effectively to a company’s profit picture.”

But Did-It’s Lee points out that while branding has been the most-offered reason for search marketing in the past, the tools marketers have said, as they did again this year, that the tools they’re using to measure SEM performance are largely bui8lt around direct response. More than 50% of those polled this time said they rely on things like site traffic, conversion rates, clickthroughs, cost-per-click or cost-per-action to track their search efforts; while only 21% overall said they monitoring the branding impact of SEM.

“It’s very hard to put a tape measure to branding, since it requires a completely different set of methodologies and measurements” he says. “And not only is it expensive to do surveys and focus groups, but there’s disagreement whether those are the most valid ways to truly read branding metrics.”

While marketers are testing new metrics that use “engagement” as a proxy for branding, such as page views and time spent on site, Lee suggest that the harder-edged DR measurements of clicks, conversions and visits may help them feed the data needs of senior company management.

Future developments in online marketing will eventually push advertisers beyond those DR metrics, Lee says. “There’s a coming convergence between search and other forms of marketing such as video ads or mobile. When you go to YouTube, you’re either searching or browsing. If you’re searching, is there something marketing departments should be doing to optimize their results within YouTube?”

The growing recognition that sales cycles often begin much before that final converting click will also make search marketers look up from those terminal metrics of clicks and conversions. “The problem with focusing exclusively on the measurable ROI metrics is that not everyone’s always ready to buy, and marketers are coming to realize that,” Lee says. “There’s a limit to how much you can attribute back to online marketing, due to cookie deletion, cookie time limits, people switching from home to office computers and so on. There’s a place in a campaign for that early-buy-cycle educational aspect of marketing, especially for high-involvement purchases. Marketers are going to want to reach me before that last moment when I’m ready to buy a cruise and just deciding between the Carnival and Princess Lines.”

“Search may actually be good at that awareness, but the rulers have been very hard to apply. But marketers are looking for ways to measure those effects, looking for multiple early touch points that influence the purchase, including interactive effects with other media such as radio or TV.”

When it came to PPC costs, 75% of advertisers responding to the SEMPO said they thought cost-per-click (CPC) prices had risen over the previous year. That compares to 100% of SEM agencies reporting the same thing. Who’s right? It’s hard to say, but it’s worth noting that 17% of advertisers don’t know whether keyword prices had risen or fallen in the past year. That know-nothing proportion is down from 25% in the last survey, but it’s still surprisingly substantial.

“Some people are still doing the blocking and tackling,” Lee says.

If those keyword prices rise further, 75% of overall respondents reported that they could withstand a hike in costs. But more than half said that increase would have to stay under 30%, and 25% of those polled reported that they would be unable to afford any further PPC cost increases—somewhat larger than the 21% who said the same in last year’s survey.

“Marketers seem to be a little bit closer to their true reserve price for paid search,” Lee says. “That’s what you would expect over time: Auction marketplaces tend to squeeze people to the point at which it hurts.” Price levels may have settled into a kind of equilibrium in which most participants feel they could spend a little more, he says. But the zero-sum nature of paid search and the fact that all three major search engines now consider ad quality as well as bid price make it likely that rising prices will persist as an issue.

Finally, SEMPO forecasts that total search spending in North America will grow to $18.6 billion by 2011, primarily through higher keyword prices, the takeoff of vertical and local search markets, and the entry of a number of smaller businesses not now participating in SEM.

But video or mobile search may not have a big part to play in that top-line search growth—at least, according to the responses in this year’s poll. In data released after the major report, SEMPO said that most respondents are interested in the potential PPC ads might have linked either to video or mobile search, but they’re not willing to pay a premium to tap into those markets.

Twenty percent of respondents said they would be willing to try video search ads if priced at the same level as general search. Of those who said they might spend more, most said any video-search premium would have to be lower than 20% above the broad search market.

Mobile marketing proponents tout the more highly qualified audiences that mobile search can command, but 50% of search marketers polled by SEMPO said they were not yet willing to pay more for mobile visitors—and in fact, 25% said they would expect to pay less.