What’s a Click Worth?

The attention search marketing is getting of late is reminiscent of our pre-dotcomer bubble burst days.

According to a statement made by CEO Ted Meisel last April, Overture is expected to reach one billion in sales this year. Just two years ago, Overture generated only 288 million in sales. This kind of success is proving that every Tom, Dick and Harry with the inclination has entered the paid search space.

Thomas, Richard, and Harrison are bidding and so are lots of other advertisers. The now famous March 2003 Piper Jaffray report, Golden Search, estimated the industry would be worth $7.0 billion by 2007.

The fallout from this increase in advertiser activity is skyrocketing click costs. Did anyone notice these increases?

Recently, comScore Networks and the IAB completed a research initiative that traveled across the country. This study showcased observed conversion habits of users clicking on paid search results as compared to unpaid search results. In two key industries, Travel and Finance, the ratio of clicks to sales was measured. To what extent do higher click costs affect the value of conversions?

Key data points from these two earth-shattering studies can work in harmony to help unravel the click cost mystery in an attempt to answer the ultimate question: What’s a click worth?

Tipping Point

At a recent trade show, the Piper Jaffray report was referred to as the search industry’s tipping point. Assuming this is a reference to Malcolm Gladwell’s book of the same title, The Tipping Point is defined by Malcolm as three factors working together to achieve a much larger effect. One, contagiousness, a.k.a. lots of people doing the same thing at once. Two, the effect little things have on a much larger scene. The third factor in a tipping point requires a dramatic moment when everything can change.

Contagiousness may be the key factor in driving click costs though the roof. Golden Search provided click cost analysis across some forty keywords on Overture for 2002. Among phrases that saw staggering increases in 2002 were PDA at 184% and Entertainment at 149%. Only seven of the keyword click costs showed a decrease over this period and even then, none were in triple digit percentage points.

Little things like click costs can really initiate a change. Competitive activity drives click costs on bidding sites and fixed sites analyze click costs on top sites to set the value of clicks in their rate cards. Through analyzing all forty keywords in the list, the average increase in click costs was nearly 50%. Can you imagine the effect on our economy if inflation increased that much? Astounding.

And it’s all happening so fast.

Research Multiplicity

The comScore study unleashed some pretty significant findings for search marketing though I’ve heard a decidedly negative buzz relating to some of the study’s possible shortcomings. In the bad news, then good news format, I have this to say.

Critics of the report stipulate that it did not distinguish between paid search formats. For example, the Ask Jeeves branded response ad unit was included with response rates. Close, but no. This ad unit is a bit of a departure from your everyday paid text link. The second complaint I’ve heard is that Looksmart links (that could arguably be called editorial listings since they typically fall below sponsored results) were thrown into the sponsored search frappe. The reality of the situation is that the Looksmart listings were not included in the sponsored link test cell.

Hearing grumbles like these makes me a little cranky. Yes, one could argue these factors might send results data in the wrong direction. Anyone who has ever worked with research data and had to present to the general marketing public is faced with the challenge of making the information both digestible and convincing. Sure, they could have gone into great detail as to the unique attributes of each search-listing format and had a two hundred-slide presentation thereby losing the audience and abandoning any hope of educating anyone about anything.

For our purposes, these criticisms will be categorized as captious and their position nugatory. What the study did offer was an educational perspective on paid search with big brands like Expedia, United Airlines, and American Express. The focal point was response rates in travel and finance industries and ultimately the conversion rates for those two category killers.

Analyzing search acquisition costs can leave you standing in a large empty room screaming in vain for tech support. It doesn’t have to be that way.

Velvet Ropes Part, Champagne Flows from the Heavens

The forty keyword costs depicted in Golden Search were accompanied by average cost-per-lead comparisons for other forms of direct marketing. Search ranked lowest at $.29 while banner ads were in the $2 range.

However, if you take the average click or lead cost for the forty keywords provided in the report, the number is in the neighborhood of $1.33 for the first quarter of 2002. Given the fact that click costs rose about 50% on average, the number would have reached $2 by the fourth quarter of 2002. A $2 cost-per-lead projection seems a bit more practical than $.29. The lower number includes the universe of search, i.e. hundreds of low traffic, low bid keywords that are otherwise undesirable for advertisers.

The comScore study provided credibility to an otherwise unbelievable new metric for search. In this immediately accountable cost-per-click world, advertisers rarely take into account indirect conversions. For all intents and purposes an indirect conversion is a sale or desired action, which occurs after the initial click and requires the user to return to the site to take said action sometime in the future. According to the study, the travel category seemed most susceptible to secondary or indirect conversions. Travel showed .7% immediate conversion rate with an additional 1.5% coming from secondary conversions.

Now that we have all the pieces to the puzzle, we can assemble some projected costs and return figures accepting a 2.2% conversion rate as a known. In the chart below, you can see the impact a rising click or lead cost can have on the return of a $20,000 spend. The first hypothetical advertiser generates $100 in every conversion. The revenue figure is realized by multiplying the number of clicks by the conversion or sales rate, then multiplying the product by the dollar amount achieved in the conversion. The advertiser can then calculate a return by dividing the total dollars into the media spend and converting the final number to a percentage.

The goal of this exercise is to find the click cost that works for your campaign. In this chart, I have reduced per-conversion revenue by 50%. As you can see, this has a pretty significant impact on the return. In this instance, the advertiser must maintain roughly a $1 click cost.

Search Marketing Harmony

Of course, all of these calculations will vary greatly with each campaign. Above all an advertiser must have a very good handle on how much money is made with each conversion or desired activity for the initiative. If every advertiser dug into effectiveness measurement in this or a similar manner, click costs might not rise into oblivion so quickly. I can dream about that world, can’t I?

About the author: iMedia search columnist Kevin Ryan’s current and former client roster reads like a “who’s who” in big brands; Rolex Watch, USA, State Farm Insurance, Farmers Insurance, Minolta Corporation, Samsung Electronics America, Toyota Motor Sales, USA, Panasonic Services, and the Hilton Hotels brands, to name a few. He is currently Director Market Development of IPG’s Wahlstrom Interactive where he provides guidance in directional online marketing to Wahlstrom’s prestigious list of clients and sister agency brands.