DoubleClick Performics 50 Search Trend Report Q1 2007.

June 6, 2007

In mid-2005, DoubleClick Performics introduced the Performics 50, an index designed to track the evolution of search campaigns within a dynamic market environment and provide a stable basis for comparative benchmarking and analysis. The key indicators of average cost per keyword (CPK), average cost per click (CPC) and return on investment (ROI) are reported each quarter, along with additional insights.

Executive Summary

Growth of Expensive Keywords Continues to Drive CPK and CPC Trends

There were nearly six times as many keywords with a cost per click (CPC) of more than $1 in January of 2007 than there were in January of 2006. This helps explain why cost per keyword (CPK) for the three months of the first quarter increased, on average, 33 percent per month over the first quarter of last year, while CPC rose an average of 55 percent per month.

While this points toward more branding initiatives as advertisers continue to broaden their programs past their respective core terms – which likely also contributed to a smaller than usual drop in CPC from December to January – the disparity between CPK and CPC growth rates demonstrates that these more expensive keywords still do not drive as many clicks as their lower-priced branded counterparts.

Expansion of Programs Driving Both Sales Growth, Lower ROI 

Total transactions in the first quarter rose 38 percent over Q1 of last year for direct revenue-based campaigns, while sales dollars lagged slightly behind at 28 percent growth for the same periods. While this sales growth is within 5 percentage points of the year-over-year growth in cost per keyword, the average number of active keywords per month in a campaign has increased by 54 percent over last year.

As a result of keyword expansion into more expensive territory, total first quarter spend increased 104 percent for all campaigns and 53 percent for direct revenue-based campaigns, which reduced ROI for those campaigns by 16 percent compared to the first quarter of last year, and 17 percent compared to the fourth quarter of 2006. Taken in this context, advertisers appear to be re-investing search revenue into greater search visibility across more keywords.

Early Returns on Yahoo! Panama Meet Expectations 

With the introduction of the Yahoo! Panama platform starting in late December of 2006 and a new ranking algorithm in February of 2007, campaigns on Yahoo! saw an increase in total keywords early in the first quarter as more advertisers migrated to the new platform. This was followed by sharply decreasing costs as the efficiencies of the algorithm began to take effect.

However, overall traffic volume on Yahoo! actually dropped as compared to the first quarter of last year, in part due to the end of the engine’s syndication of search results to Microsoft late in the third quarter.

Detailed Report

Cost Per Click and Cost Per Keyword Trends Figure 1 illustrates the trend lines for both CPK and CPC during the past 15 months. On average, CPK grew 28 percent per month over the first quarter of last year, while CPC rose an average of 55 percent per month. CPC dropped only 6 percent from December to January, compared to last January, when the beginning of the new year brought a 19 percent reduction from the premium holiday prices.

Figure 1: Cost Per Keyword and Cost Per Click

The six percent drop in CPC may be smaller than witnessed in previous years in part due to the migration to the new Panama platform on Yahoo!, where advertisers may have introduced their keywords on the new system at a higher price than they would have maintained on the old. As demonstrated in Figure 2, CPC on Yahoo! actually increased in January. While Panama may be part of this trend, there may be other factors, as CPC on Google dropped only 8 percent in January versus December, compared to 18 percent last year.

Figure 2: CPC by Engine

Also evident in Figure 2 is the steep drop in CPC from January through March for Yahoo! keywords, which is attributable to the new ranking algorithm introduced in February (for further discussion of Yahoo!’s algorithm, please see “The Effects Of Panama” later in this report).

The biggest component of this year-over-year increase in both CPK and CPC is the rapid growth of expensive keywords. Figure 3 displays the number of keywords with a CPC of more than $1 per click trended over the past 15 months.

On average, the first quarter of 2007 featured six times as many of these keywords per month than the same period one year ago. By comparison, keywords priced $0.20 or lower did not grow in number over the first quarter of 2006.

Figure 3: Growth of Expensive Keywords

While expensive keywords drive a high number of impressions, they are generally not being clicked on at as high a rate as those less expensive words. The latter explains why CPK growth s not as fast as that of CPC, and why there was a bigger drop in CPK, from December to January, than for CPC.

ROI Trends and the Impact of Expensive Keywords on ROI

The first three months of 2007 yielded more sales dollars than any previous first quarter in the history of the Performics 50. Figure 4 exhibits the year-over-year growth for both the number of transactions and the sales dollars going back to 2005 for direct revenue-based campaigns. Compared to last year, transactions grew 38 percent, while sales grew 28 percent.

Figure 4: Year-Over-Year Transactions and Sales
(direct revenue campaigns only)

With cost per keyword growing year-over-year at an average of 33 percent per month, and sales growing 28 percent, one might expect that ROI is getting only slightly smaller over time. However, as discussed in the previous Search Trend Report (see “Search Trend Report; DoubleClick Q4 2006”), costs are increasing at a faster rate, so that the derived ROI is shrinking. Compared to the first quarter of 2006, ROI is down 16 percent, as demonstrated in Figure 5.

Figure 5: Return on Investment
(direct revenue campaigns only)

While the growth of expensive keywords is a key factor in the decline of derived ROI, a deeper analysis shows that these keywords may actually improve the performance of other keywords in a campaign. The campaigns that have spent the most money on expensive keywords over the entire 36 months of the Performics 50 data have shown an increase of 1.8 percentage points, or 33 percent, in the conversion rate of first-place, low-CPC keywords. This lends some credence to the argument that generic keyword spend increases brand keyword performance, as those first-place, low-CPC keywords are presumably brand terms.

The overall ROI picture is one of advertisers reinvesting their search revenue into greater visibility and branding. The rate of return is lower, but that may be due to conscious efforts to reinvest in areas where direct ROI is not realized at the same rate and benefits ranging from improved performance on branded terms to impact on offline sales exist.

Here It Comes, Full Blast and Top Down: the Effects of Panama

Not all of the trends from the first quarter point to increasing prices and increasing keyword costs. As previously demonstrated by Figure 2, a steep decrease in CPC for Yahoo! Keywords was reported in the last two months of the quarter. The new ranking algorithm behind the Panama platform is designed to give a certain amount of “price protection” to highly relevant (i.e., branded) keywords, and with the amount of
branded activity in most paid search campaigns, this reduction in CPC was expected.

Figure 6 shows that overall, search spend onYahoo! campaigns was up only 33 percent in the first quarter of 2007 versus the same time period last year (compared to an increase of 124 percent year-over-year on Google). For now, advertisers are mostly pocketing the savings on Yahoo! – perhaps in response to the increasing costs on Google and MSN – rather than reinvesting those dollars in more expensive terms. As advertisers learn the nuances of the new platform it is likely they will begin to reinvest the savings back into their Yahoo! programs.

Figure 6: Yahoo! Spend

Figure 7: Average Rank and Clickthrough Rate on Yahoo!

However, year-over-year growth in transactions and sales has been mostly stagnant for advertisers in the Performics 50 on Yahoo! One likely factor in this trend is that, as of August 2006, MSN began fully supplying their own adCenter listings, and no longer syndicated Yahoo! Paid search results on their search pages. As a result, the number of searchers seeing Yahoo! results was reduced.

Figure 8 shows the difference in year-over-year transactions for Yahoo! alone, Yahoo! plus MSN, and Google. MSN has clearly picked up some of the reach that Yahoo! lost with the end of that syndication deal. However, the combined total is growing at a slower rate than Google.

 Figure 8: Year-Over-Year Transactions
(direct revenue campaigns only)

While transactions and sales are down on Yahoo!, the silver lining is that it took fewer clicks nd less spend to get them. As advertisers become more proficient with the Panama platform, the industry should expect robust growth throughout 2007 for Yahoo! programs.

Conclusions

Cost-Sensitive Advertisers Should Watch Their Branding Campaigns More Closely Immediately After the Holidays

In past years, costs and prices have both decreased sharply after the end of the holiday season. With the increasing use of more expensive, generic keywords in paid search campaigns, this drop has lessened, which could affect advertiser expectations and budgets for the rest of the year. Re-evaluating expected spend throughout the year, and being better prepared for increased spending levels in the early part of next year, would be prudent courses of action.

Advertisers Invest In Expensive Keywords, Affecting More Than Just ROI

While the dramatic increase in expensive eywords is pushing ROI down overall, total sales are up for the quarter. Additionally, the exposure generated by these expensive search terms is having a positive impact on other keywords in advertisers’ programs. Looking beyond the direct return at the keyword level, even looking to offline sales in some instances, can put the full value of increasing search costs in proper context.

Fair Warning for Panama

Campaigns are realizing cost savings on Yahoo! with the introduction of the Panama platform and ranking algorithm, but year-over-year sales on the engine are down as total reach was likely curtailed as syndication to MSN ended. Advertisers may want to consider reinvesting Yahoo! brand savings on generic spend, and look to MSN to more accurately gauge year-over-year sales.

Methodology

The Performics 50 represents 50 actual paidsearch campaigns managed by DoubleClick Performics’ SEM experts using the DART service and DoubleClick Performics’ proprietary platforms. The index itself was established in August of 2005 as a means of providing industry benchmarks among search engine marketing campaigns, using data going back to early 2004.

Initial membership in the index was determined based on the size advertisers’ campaigns in the first three months of 2004 and put into effect in April of that year. New campaigns have been added only when campaigns previously in the index have deviated significantly in traffic, again based on campaign size for the current month and the prior three months.

DoubleClick Performics manages approximately 280 active campaigns across a wide range of industry categories. The Performics 50, while composed exclusively of DoubleClick Performics campaigns, is intended to reflect the larger universe of marketers engaged in paid search engine advertising.