Pay per click, soon to die ?

[krooga]

As most of you probably know, billing for adverts on major search engines occurs via a Cost Per Click model. Each click on a particular ad drives up the bill for advertisers.

I have been thinking about why this business model is unstable and likely to collapse in the near future; I would be interested in hearing your opinions on this matter.

As research shows, more and more businesses are turning to search engine paid marketing strategies for their promotionnal needs, as a result cost per clicks on average are rising due to the growth of advertisers. In the current state of things I would without a doubt say that most advertisers are obtaining good return of investements with this method of advertising. Fast forward to a year's time, the number of advertisers would have grown significantly along with the cost per click prices...

My feeling about this is that as more advertisers use the cost per click model, it will become tougher to break even and eventually will come a point where advertiser's return on investment will become null.

Add to this the growing problem of click fraud and I think you will find that the PPC/CPC model hasn't got a bright future...

Your opinions and arguments will be much appreciated;

Sam

[ADAM Web Design]

The problem with that argument is that, as soon as the bottom falls out of PPC, there will be companies and cheap spammy types that will still use it as an advertising source.

Claria comes to mind.

[Duncan Pollock]

I for one am not quickly convinced.
I'm in the real estate business and benefit considerably from my use for AdWords. However, I'm quite sure that I'm a decided exception to the rule.
Admittedly, there isn't much question that the industry is notorious for spamming the search engines whenever they have/see the chance of it. Just talk to any ODP editor and they'll very quickly confirm this fact. (Right, cbp?)
Nevertheless, the major SERP presence is by way of corporate sites and the majority of agents link themselves to these (e.g. Our Agents -- Agent so-and-so -- About Me -- See my listings). This means that unless the corporate people themselves believe that participation in AdWords would be advantageous, the agents aren't going to perceive the relevancy. Indeed, I can imagine that a great many of them aren't even aware of the possibilities.
Thus, unless they have a dedicated personal site -- and I'm fairly sure that this amounts to no more than 10% of all agents -- I don't foresee any climb onto a band wagon. Rather, my guess is that only 10% of the 10% use AdWords. This isn't going to drive bids up. Indeed, one of my campaigns gets me on Page 1 for a trifling 9 cents.
True, there are other industries (perhaps lots of them) where PPC prices may balloon. Overall, though, I don't think it's going to be a widespread happening.

Duncan

PS. To support my view, maybe I can mention that, as far as I'm aware, I'm the only agent out of some 900 in my geographical area who has an AdWord campaign. (But please don't tell the other 899!)

[ctabuk]

Duncan, given the latest thing being your URL title is the first thing that the SE's pick up, would DuncanPollockRealEstate.com not be a good move?

OK - I've not done any PPC for 18 months, in fact I don't advertise period. I was put off by spammers, bad admin from the SE's. I don't think that PPC will die out my reasons are as follows
1 - Unless the Banks start to realise the nature of SEO/Forum useage then large numbers of new businesses will have poorly optimized sited or worse no optimization. In my opinion Web Site optimization should be part of any business plan.
2 - Because of the delay in getting SERP because of my first point businesses will still respond to 'Get your site top on Google' adverts. We must not kid ourselves here - the Internet is still a baby and baby's pee themselves and so will many businesses in their start ups.
3 - Gullibility of users

[greeneagle]

krooga:

"I have been thinking about why this business model is unstable and likely to collapse in the near future; I would be interested in hearing your opinions on this matter."

IMO - If there was such a thing as a "negative chance", I'd bury that idea right along with it.

It's the fabric of the Internet, modeled directly after conventional business marketing techniques and systems.

Jagger and BigDaddy have made good progress in addressing problem issues in an ever maturing and expanding system.

That's primarily what that was all about.

Ken

[intelliot]

Basic microeconomics. In any industry, profit will be pushed to zero. That means you can cover your operating costs and salary. It'll be fine.

[chessmaniac]

I do not think it will die. As long as the advertiser has a choice and can control their own ad set up and message there will all ways be a market for CPC. I use content ads as the search engine market can get a bit expensive. Content and site targeted ads take a little more effort to find the right niche but once you do it can become a good way to drive traffic to your site. However, I always budget in search engine market too as this is the easiest way to get new people to your site.

[cjreynolds_1984]

I think everyone is slightly missing the point - PPC is a form of advertising - an activity undertaken to generate a positive ROI for the advertiser. At the moment that ROI is almost certainly better in many (possibly most) industries than say print, broadcast, direct mail, telesales etc.

This is due to it's inherent advantages as a medium in terms of displaying extremely targeted ads which other marcomms channels based primarily on demographics could never hope to emulate.

However as you rightly point out - because of this more and more businesses will advertise on PPC systems (realistically YSM and AdWords which have the greatest market and mind share), which will drive up the CPC of ads.

Eventually this will reach the point where the ROI is similar or equal to the ROI of other direct response media such as telesales and direct mail.

At this point CPC will not die and unless replaced by Cost Per Call it never will but it will become just another tool in the marketers box instead of the fantastic opportunity to generate huge ROIs that it is today for many businesses.

When this point will be arrived at will differ by market, product and geography but it will ultimately be the case.

[mpprh]

Originally Posted by krooga

As most of you probably know, billing for adverts on major search engines occurs via a Cost Per Click model. Each click on a particular ad drives up the bill for advertisers.

I have been thinking about why this business model is unstable and likely to collapse in the near future; I would be interested in hearing your opinions on this matter.

As research shows, more and more businesses are turning to search engine paid marketing strategies for their promotionnal needs, as a result cost per clicks on average are rising due to the growth of advertisers. In the current state of things I would without a doubt say that most advertisers are obtaining good return of investements with this method of advertising. Fast forward to a year's time, the number of advertisers would have grown significantly along with the cost per click prices...

My feeling about this is that as more advertisers use the cost per click model, it will become tougher to break even and eventually will come a point where advertiser's return on investment will become null.

Add to this the growing problem of click fraud and I think you will find that the PPC/CPC model hasn't got a bright future...

Your opinions and arguments will be much appreciated;

Sam

Hi

But in fact, as more people enter the game, the price per click is moving downwards ?

Peter

[SearchEngineZ]

With time a CPA model will be merged in with PPC, and they will run together. Some advertisers (for example Chrysler) will prefer to pay per click, and some (ie iTunes) will pay per registration or % of purchase price. The winning model will please everyone. I'd expect the first to do so will be Google Adwords.

Rob

[kjohnson5576]

Over the past two years, PPC has risen in price dramtically for me. New methods of wording and a more constant attention to ads, price, placement, etc are now eating into time once used to work on the site. ROI isn't bad, and like most retail, I strive to keep my advertising expense to 10% of sales, although it is usually closer to 15%, and for a while, 20% of sales (unprofitable).

The problem with relying on organic placement only is that if you sell a large variety of products, there is no way you can possibly reach all the keyword targets you need to drive profitable traffic to your site. Also, your competitors know this and use PPC advertising in order to maximize their market share. Even the giants like Amazon and Overstock do not place in the top 10 (or 20 or sometimes 30) for each item they sell.

The problem with PPC is the big boy retailers often times don't have a problem with huge PPC prices that are unaffordable to smaller folks and I think, often times unprofitable to themselves. These large PPC spends drive the smaller folks from the top of the sponsored links in favor of those with more marketing dollar muscle.

When it comes down to it, PPC will stay because if it gets too expensive, then bottom line margins are squeezed too thin for everyone. Also, the average consumer of x,y or z doesn't want to purchase from just two to ten large firms that all carry the same stuff with the same quality. Those firms are located at the local mall anyway and they've already seen the stuff and rejected it. (I'm only looking at this from a retail standpoint).

People who offer services, like real estate, website design, consulting, law, i.e., no tangible hard products except information, experience and talent, would appear to me to have a more difficult time with PPC since the return to the advertiser is a set, hourly wage or commission. Being able to tally the real ROI for a PPC campaign on products that may take a week or months to complete would appear pretty tough, not to say that it can't be done though.

[WineGuy]

I don't use pay-per-click anymore personally but do not see it dying but actually morphing into more efficient formats. Right now my interest in search engine advertising has been reignited with the new 'PPC' acronym "pay-per-call" which for most sales organizations is probably a more attractive and much more locally targeted method for using the internet. I would rather answer the phone with someone on the other end that wants my product or service and from whom I can collect info and build a relationship with and pay a premium for that than have 'invisible prospects' causing my Google Adwords balance go through the roof.

Also as a side note, one of the effects everyone should be aware of with the rising cost of pay-per-click terms and fraud is that it is effecting prices of keyword domain names that receive type-in or organic traffic. So if you are looking at investing in a particular domain name you want to acquire do it sooner than later as the prices are still accessable to most individuals.

Cheers!

[RFA]

To say that becasue cost of PPC is going to rise will definitely put an end to the model is like saying that there is no point to any entrepreneur to enter new markets. Yes, prices are rising due to the fact that more advertisers are fighting for the best places. But as cost will rise and ROI will be reduced some market players are going to exit that type of advertisement because too costly. Only those with some large budget and well formatted campaigns will survive eventually until a new form of advertisement comes in. I manage PPC and while my cost have slightly risen, by optimizing my campaigns and geographic target, I can optimize my ROI.

I also believe that we are only seing the peak of the iceberg and that very soon many new entrants will come into this new market and prices will vary upward in the next few years. Supply and demand.

A way to reduce costs then will be by, hopefully, the addition of new tools provided by ad supplier to target more precisely your audience.

Well... that's it..... just a thought

regards,

[drew-z]

PPC is not going away. Yes the economic equilibrium will continue to fluctuate in many inefficient segments of PPC but this should not be confused with an unsustainable market. More efficient segments of PPC, like online gaming, have been way ahead of other industries and are a forerunner of where PPC is headed competition wise.

As particular PPC niches become more efficient, the only way to succeed will be to profit more per lead than the next guy. So the key for businesses IMHO is to maximize the profit OPPORTUNITIES for particular keywords. For example, if a two real estate sites are competing for the same keyword and one can make money from legal and mortgages in addition the real estate they will (in theory) be the long term winner. They covert more leads to profits. So the key is to focus and then create as many profit opportunities as possible and go deep with those verticals.

My 2 economic cents

[Michael Williams]

Wow, you couldn't be more wrong about the future of PPC advertising krooga!

PPC is here to stay and will eclipse all other forms of internet advertising in the future. I've tried absolutely every type of advertising ever made available on the web, and PPC is the only model that really works as it follows supply and demand economics. Remember banner advertising? Well that's dead because advertisers were plowing all kinds of money into banner budgets and they found out real quick that they didn't convert to sales as expected.

Advertisers will only pay to advertise in a medium that works, in this case text based ads costed per click, period! Text based relevant ads work, no one can dispute it. If you are paying too much for a keyword and it isn't converting you will drop it if you have any sense. This is the natural balancing fator that makes PPC so successful.

Unfortunately, it also means that successful companies with significant funds will crowd out the smaller operators in certain market segments, as companies like Dell Computer, Expedia and Blockbuster have done in their industries.
Click fraud is a cost of doing business and can be absorbed, look at banks and credit card companies, they function just fine and deal with fraud.

PPC is here to stay.
Now if you want to discuss the coming collapse of adsense or other contextual ad programs I'll put my 2 cents into that coming disaster.

[janeth]

As Yahoo, MSN and many others enter into the PPC models it seems to me the prices will be going down and not up.

[skyway]

My company used to spend about $1500 a month, in Overture/GoTo, for about 5 years. We did not get the return on investment we expected. For the pay-per-click to work in our industry, we needed to generate over $5000 worth of sales from the advertising to cover the $1500 - and we did not. We experimented around and ended up scaling it back to about $300 a month with Overture. When we first started with Google we spent about $300 a month and got a terrific response, but then that went south, so we have kept a low budget there, as well.

I don't think the pay-per-click model is going to collapse any time soon. There are too many companies out there looking for an edge and too many newcomers at any given time for this form of advertising to go completely belly up.

[Andilinks]

janeth and I have had our differences but she has hit the nail on the head this time.

The whole thing is econ 101: supply and demand. As prices rise more players enter the field, it's that simple. And as cjreynolds_1984 correctly pointed out if PPC reaches parity with traditional media growth will slow.

That's the most pessimistic forcast I can come up with for PPC: growth may slow. Or not. :)

[DrTandem1]

The only thing that drives PPC is frustration at not being found in the organic SERPs.

[Andilinks]

The only thing that drives PPC is frustration at not being found in the organic SERPs.

Free per click beats PPC, but this is the basis of all advertising. If people can find your business without any effort on your part you don't have to advertise.

[promarkweb]

I'm not quite sure how we're at the point of a model dying, when we're still in the infancy of the product. This is still a brand new form of advertising. In real world years, we haven't even figured out how to best work this system.

I think you'll see engines move towards the Google way, that depending upon your success rate, you can move up while not paying the most per ad. Also, as others have mentioned, you can also expect to see the engines start to work with advertisers to track conversion, as Google has already started to do.

Finally, do we really think that search is going away? And that the most effective form of advertising in this medium of PPC will go away? I think it's a little premature to call the demise of such a new medium, just like everything else, people will only pay an amount that works for them. And PPC prices will drop, and people will learn how to play nice.

One client of mine actually competes at less than a dollar a click in a market that can demand up to $15 a click on Yahoo by using Google's system and working it properly. With an average sale of $10,000.00 with a GP of 15%, we're getting a lead out of every 5-7 clicks. Not too bad considering how competetive the market is for their keywords.

Another new client is shocked we're bringing in over 200 visitors a day to their site for under $100. And the final piece that I'm noticing people aren't mentioning is the shear value of simply having your name seen 3000 times a month or more depending on the keywords.

I think PPC is here to stay, for quite a while, and the search engines will simply learn to perfect the process. Also, I do like the idea of Pay Per Call that I've seen some companies starting to promote. Interesting idea.

At the end of the day, it comes down to making sales, and that's all it is.