DoubleClick Performics 50 Search Trend Report Q4 2006

March 21, 2007

In mid-2005, 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.

With the report for the fourth quarter of 2006, the index has been expanded to include advertisers managed by Performics on DoubleClick's DART Search platform and to include programs on MSN's adCenter platform. Changes to the selection criteria for the index were made as a result of this expansion, and made retroactively, so absolute values may have changed from previous reports. 

Executive Summary

CPK Surge Demonstrates Consumers Searching Earlier in the Holiday Season. 

Consumers began online holiday shopping via search earlier in the season, presumably when they were nearer the top of the “purchase funnel.” They clicked on more high-priced and generic keywords in November, while in December they clicked on lower-priced brand terms. This shifted marketers' search costs earlier by one month, while transaction trends remained largely unchanged. As a result, November of 2006 witnessed an increase in total clicks that drove up CPK for the month to $52.42 from $38.41 in October, which was followed by only a slight increase to $54.14 in December.

Total Return from Paid Search Continues to be Lucrative for Advertisers. 

Total sales from search programs provided considerable return in absolute dollars as spend increased, although the return on search spend dropped as a percentage ­gure. Revenue attributed directly to search in the fourth quarter of 2006 increased 43 percent over the fourth quarter of 2005, while the total sales increased 55 percent in 2006 versus 2005.

More Verticals Enter the Search Space. 

In 2006 search spend grew 126 percent over 2005, with half of that growth derived from advertisers not included in the index until 2006 as part of the regular turnover in the index. Total search spend rose due to increased search activity by industries such as automotive and fi­nancial services.

Detailed Findings

Cost Per Keyword and Cost per Click Indicate a Longer Holiday Shopping Period.

CPK, a measurement developed by Performics to track the paid search industry's quality of growth, is calculated by multiplying the total clicks received each month by the CPC for all active keywords. CPK reached a high of $54.14 in December of 2006, which represents an increase of 53 percent over the third quarter high of $35.37. The largest month-to-month increase in CPK occurred in November, when this metric increased 36 percent over October. CPK growth from November to December was relatively small.

Although CPK experienced surges in growth throughout the fourth quarter, CPC grew more steadily. Compared to September, the ­nal month of the third quarter, CPC increased 22 percent whereas December 2005 versus December 2006 growth was 42 percent. 

After tracking closely with 2005, CPK in 2006 began to diverge towards the end of the third quarter. Rather than a steady climb to a December peak, CPK jumped in November. The increase in volume was followed by aggressive growth in advertisers' keyword lists in December in response to November's demand, which increased the total number of active keywords and slowed CPK growth despite higher click prices.

The differences between CPK and CPC illustrated in Figure 1 also point to a trend in paid search: searchers often click on higher-priced generic search terms earlier in the purchase funnel, and subsequently convert on lower-priced brand terms. Figure 1 Consumers demonstrated this search behavior during the holidays and particularly throughout December, but the emphasis on “Cyber Monday” and post- Thanksgiving shopping appears to have shifted behavior: the earlier “browsing” or investigative stage, where consumers are more likely to search and click on these expensive generic terms, shifted into November. In the fourth quarter of 2006, this shift drove up CPK earlier than in prior years. Purchase behavior, however, has remained consistent, as consumers clicked on the lower-priced brand terms in December, which kept CPK from rising as much as it has in prior years.

Figure 2 demonstrates how the percent of clicks from more expensive keywords (the bottom line on the graph) increased in the fourth quarter of 2006 - with a jump in November - at the same time that the percent of transactions from less expensive keywords (the top line) increased.

While costs shifted back to November, Figure 3 demonstrates that, despite the early start to the process, consumers still made actual purchases at nearly the same time as the previous two years. 

As continued media emphasis is placed on the phenomenon of “Cyber Monday” and as Yahoo! adopts its new ranking algorithm (which will likely create a wider gap in CPC between brand and generic terms akin to Google, see “Search Trend Report Q3 2006”), the trend toward shopping earlier and the associated increase in November search costs will likely be even more prominent in 2007.

Advertisers should keep this in mind when setting expectations for spending and sales next year. There are several ways marketers can keep up with changes in consumer behavior. First, marketers can increase spend on generic terms earlier in November to attract consumers earlier in their decision-making process. This should bring consumers closer to the end of the purchase funnel nearer to Thanksgiving. Marketers can also use aggressive promotions that encourage consumers to pass through the funnel more quickly. 

Spending Money to Make Money

In addition to the unanticipated spike in November, search spend over the entire year also increased. The overall search investment (as seen by the growth in CPK) increased throughout 2006, which indicates that marketers continued to reap positive rewards from search marketing, and are willing to further invest in this medium. For revenue generating search programs, return as a function of spend for 2005 through 2006 is represented by Figure 4. The data are sorted by total sales, not by date, in order to display growth as spend increased, however the rightmost point on the chart is December 2006.

As a percentage of spend, however, return appears to be ­attening over time, as demonstrated in Figure 5. This gradual decrease may not be enough to blunt the growth in absolute sales dollars, as ROI is still high enough to generate considerable return on the increasing investment in search.

It is expected that the in­ux of marketing dollars into paid search will continue until there is parity between the ROI from search and that from other marketing channels. As the search market evolves and more industry verticals recognize the competitive advantage of search visibility (such as automotive and ‑nancial services, as noted earlier in this report), sales should continue to grow, albeit at a slower pace than previous years.

Newer, Bigger Advertisers Are Spending More 

Marketers continue to invest in this relatively inexpensive medium as overall return increases. Figure 6 indicates that overall search spend in the fourth quarter of 2006 increased 78 percent over the third quarter of 2006 and 105 percent over the fourth quarter of 2005. Total annual spending on search for 2006 increased 126 percent over 2005. Note that these numbers also reflect the retroactive methodological changes discussed in this Performics 50 report. 

Similar to the methodologies of other major tracking indices, inclusion in the Performics 50 is dependant upon an advertiser maintaining a level of activity consistent with others in the market. Over time, some advertisers drop out as others, who are more accurately representative, take their place, further reflecting the changing landscape of the paid search space. In 2006, approximately 75 percent of the index consisted of advertisers who remained in the index for the entire year.

Figure 7 demonstrates how a considerable portion of the growth in search spend came from the remaining 25 percent, as larger vertical markets like automotive and financial services increased their involvement in paid search. Search spend for advertisers that belonged to the Performics 50 for all of 2005 and 2006 increased a more moderate - but still robust - 85 percent.

Figure 7 demonstrates that overall search spend is increasing and suggests that traditional brand marketers find value in paid search marketing. Also traditional media campaigns pointing consumers to search - “Google Pontiac,” for example - supports this assumption, as does a recent DoubleClick study which found that 47 percent of 'influencers' are extremely likely to search after seeing an offline ad (see “Influencing the Influencers: How Online Advertising and Media Impact Word of Mouth,” available at www.DoubleClick.net).

The Effects of Stretching the “Purchase Funnel.”

The emphasis on “Cyber Monday,” combined with the habits of online consumers, resulted in an increased number of clicks and associated click charges in November. However, the transactions resulting from those clicks generally occurred in December, consistent with previously observed buyer behavior. Understanding the interplay between higher-priced generic terms and lower-priced brand terms in the holiday season can help advertisers plan their search strategies and budget needs throughout the year. Additionally, another strong “Cyber Monday” in 2007 will likely result in more activity (and therefore spend) shifting to November, especially with Yahoo!’s new ranking algorithm is in full effect. 

How Much Spend Is Too Much Spend?

While ROI is leveling as a percentage of spend, total sales continue to grow impressively for ROI- and sales-driven advertisers. 

Advertisers should consider both the percentage return and total volume of sales in order to accurately assess the performance of a search campaign; too much reliance on either metric may result in a skewed perspective. This is especially important as more and more advertisers recognize that the return from their search investments may come from latent online sales, offline sales, or improved brand positioning.

Methodology 

The Performics 50 represents 50 actual paid search campaigns managed by Performics’ SEM experts using DART and Performics’ proprietary platforms. It was established in April of 2004 as a means of providing industry benchmarks among search engine marketing campaigns, based on advertisers’ campaign size for the first three months of 2004. New campaigns have been added only when campaigns previously in the index deviate significantly in traffic, again based on campaign size for the current month and the prior three months.

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

About Search Marketing with Performics

Performics’ approach to managing search marketing encompasses strategy, planning and execution. We consult with clients to identify strategic opportunities in search, both as an ROI-driven channel and an opportunity to establish or extend brands.

With goals established, our expert account teams execute campaigns, relying on our proprietary search management platform and provide full-service support for all aspects of the campaign, including keyword build-outs, copywriting, bid strategy, reporting and analysis. Performics measures its effectiveness in managing search engine marketing programs by helping clients set smart goals and objectives in search and by measuring progress against those goals month over month and year over year.