DoubleClick Performics 50 Search Trend Report Q3 2006

December 18, 2006

In mid-2005, Performics introduced the Performics 50, an index designed to track the evolution of fifty well-managed search campaigns within a dynamic market environment and provide a stable basis for comparative benchmarking and analysis.

Executive Summary

Advertisers utilizing search as a marketing channel will experience enormous benefits going into 2007, as returns from search engine marketing continue to trend upward. An increased understanding of how to successfully navigate, measure and monitor the medium is furthering marketers’ goals.

Marketers Continue To See Payoffs from Increased Spending in Search

Nearly three-quarters of the Performics 50 marketers have increased their quarterly spending on paid search marketing by over one-third in Q3 over the previous quarter. Given that the Performics 50 is representative of major marketers, this increase is indicative of the overall industry growth and increased importance advertisers are placing on search.

The majority of Performics 50 (63%) marketers have also seen an average increase in their paid search revenue of 33%. This is commensurate with the larger budgets marketers are allocating to their search engine marketing activities.

Cost per Keyword Can Be Used to Monitor Overall Campaign Performance During the Holiday Season

Cost per Keyword (CPK) measures how much it costs to own a keyword over the course of a month. As such, monitoring the average CPK of a keyword portfolio provides marketers with ongoing visibility into the overall effectiveness of paid search campaigns. Wellmanaged campaigns, such as those within the Performics 50, increase the ROI of search engine marketing by blending higher-priced, competitive generic terms with lower-priced brand and “long tail” terms.

A fourth quarter increase in a campaign’s CPK should be expected, particularly in December. However, if CPKs fail to grow over previous quarters by at least 15%, sales opportunities may be lost. Lack of growth may indicate bids are not high enough to sustain visibility on more competitive keywords. Alternatively, if the average CPK shows an increase over previous quarters exceeding 50%, this may indicate a need to make more effective use of the generally less expensive terms in the search tail.

The Run for the Holidays

Traditionally, the run up to the holidays begins in October for paid search marketing as illustrated by the Cost per Keyword metric. This year, however, initial data suggest the run began in August.

Although Cost per Keyword declined from August to September—similar to 2004 when a rapid increase began in September and was sustained for the remainder of the year— DoubleClick Performics 50 Search Trend Report: Q3 2006 marketers are more willing to spend incrementally on critical keywords to ensure they are in first position.

Early maneuvering for first position may serve marketers well, as the industry increases its understanding of the branding impact of search marketing and the interplay between search and other advertising channels.

Increased Visibility Paying Dividends to Marketers

Conversion rates and total clicks have both increased over last quarter; up 4% and 3%, respectively. These increases were driven, in large measure, by higher visibility of critical search terms on search engines. The average rank of higher-priced keywords (those over $1 per click) has jumped two full positions to an average rank 2.87. Given the intense competition among marketers for these terms, the two point improvement is very significant.

Results and Findings

Aggressive Bidding Pushes Cost per Keyword Up

From January to July of 2006, average CPK tracked very closely with last year’s data. The comparison between this year and last year is represented in Figure 1.

In August, aggressive bidding on expensive search terms started pushing CPK higher.

As indicated in the chart, CPK was actually less than that of one year ago in July; $30.74 compared to $32.33. However year-over-year numbers for August and September are up to $5.76 and $3.78, respectively.

Average CPK at the end of the quarter grew 20% over the end of the previous quarter, rising over the 3 months from $29.23 in June to $34.98 in September. Projections estimate December 2006 to reach a high of $68, an 18% increase over last year, compared to a 52% year-over-year increase in December of 2005.

The relative stability of the CPK throughout the first half of this year and lower year-over-year increases are indicative of industry maturation. Well-managed campaigns will offset higher-priced keywords with lower-priced keywords, utilizing the interplay between branded and supporting generic terms to achieve the best overall results.

Throughout the holiday season, retailers can track CPK as a 3 DoubleClick Performics 50 Search Trend Report: Q3 2006 Source: Performics 50, Q3 2006. Year-Over-Year Cost per Keyword Figure 1 means to achieve the proper balance within a keyword portfolio. An overall increase is to be expected. Therefore, if CPKs fail to grow over previous quarters by at least 15%, marketers may be missing sales because they are not bidding high enough on more competitive keywords. Similarly, if the average CPK shows an increase over previous quarters, exceeding 50%, consider reallocating budgets to make more effective use of less-expensive “long tail” terms.

Average Cost per Click Decreases in September

While total clicks across Performics 50 campaigns grew slightly throughout the quarter, the strongest driver of change in CPK was the increase in the Cost per Click (CPC) of keywords under management. Advertisers are buying just as many clicks on just as many keywords, but a higher unit price is driving up the total cost.

As represented by Figure 2, CPC reached its highest point of the year in August before retreating in September and ending slightly above July levels.

Performics’ historical data proves that the average CPC will surpass each year’s previous high late in the second quarter or early in third quarter of the following year. The 2004 high was surpassed in September of 2005 and this year was surpassed in July. Given the relative stability of the average CPK, the year-over-year increases in CPC are well within manageable levels.

In the third quarter of 2006, keywords priced at more than $1 made up more than half of the overall search spend, as represented by Figure 3.

This is the first time in the history of the Performics 50 that this class of expensive keywords has comprised the majority.

Marketers are seeing more advantages from these higher-priced keywords than they have in the past, providing additional benefits that can offset the increased costs.

Visibility of higher-priced keywords has improved, as measured by the average rank of all keywords priced higher than $1. While the average CPC of these search terms has increased slightly less than 50% since February of this year, the average rank has jumped two full positions from an average rank of 4.87 to 2.87. These results are represented by Figure 4.

This increased visibility is having a positive effect on all aspects of performance. As Figure 5 represents, keywords at this price point have experienced steady improvements in both click-through and conversion rates. This is in addition to conventional wisdom that higherpriced, high-positioned search terms yield tremendous lift to other keywords, particularly, brand keywords.

In addition to the increased conversion and click-through rates of higher-priced terms, these metrics also increased across all keywords. Conversion rates averaged nearly 7% higher for the third quarter when compared to January and clickthrough rates increased over 6% for the same period (third quarter average over January).

Growth In Spend Is Fairly Widespread

In August, thirty-seven out of the fifty marketers in the Performics 50 Index increased their overall search spend, in July, by an average of 33%; this is an indication of the continued growth of search marketing. However, this year’s growth is somewhat slower than the growth witnessed last year. By October 2005, search spend rose to the level of December 2004 whereas this year, click charges may not overtake last December’s total until November. This is depicted in Figure 6.

The fourth quarter Search Trend Report will continue monitoring this trend.

The Road to Panama

With the upcoming release of the Panama platform for Yahoo!, it is important to look at some of the key differences between the existing Yahoo! platform and Google, in an effort to gauge expectations for what will happen to paid search programs when the transition is complete.

The biggest change will be to the algorithm that decides where a search ad is displayed. Currently, Yahoo! is an open market, where the highest bid gets the highest position. Google is a mixed model that combines both the bid price and the relevance of the ad itself, as determined by its click-through rate.

Figure 7 illustrates the difference between the two models using data from the third quarter of 2006.

More than 30% of clicks on Google came from keywords that are priced at 10 cents or less per click and still hold the top position. Much of this can be attributed to brand keywords which hold a prohibitive advantage in relevance over the competition, particularly in markets where there are many resellers of that brand.

The brand keyword advantage on Google may be compounded on Panama by the fact that Yahoo! subsumes many misspellings of search terms under a single bid. Google’s model, by comparison, allows marketers to purchase misspellings separately. This distinction will continue with the new algorithm.

As Yahoo! adopts the mixed CPC-relevance model, advertisers may spend less on their brand terms, particularly in those markets with large numbers of resellers. Marketers selling their own brands will typically be viewed as more relevant than retailers selling multiple brands. This will give merchant brands an advantage in the relevance component of the model. Name-brand retailers may also see a change, but perhaps of a lesser magnitude.

A current tendency is to reinvest those savings (from branded terms) into more competitive terms, as shown by the growth in overall spend coming from higher-priced, first-place keywords on Google. Whether that tendency extends to the new Yahoo! platform remains to be seen.

Conclusions

Marketers continue to see strong value in search and continue to increase their investments in the medium. Furthermore, they are becoming increasingly proficient jugglers of branded terms, high-priced generic terms and lower cost, lower-volume “long tail” terms.

This proficiency is evidenced by the early ramp-up for the holidays, as marketers now know that it is best to build a keyword’s history in order for it to reach maximum effectiveness.

The impact of the algorithm changes with Yahoo!’s Panama platform remain to be seen; however, Performics believes the overall CPK will decrease as branded keywords become relatively less expensive. The cost savings from these keywords will be reinvested as marketers gain greater understanding of the value that non-branded or generic keywords have on total ROI. This reinvestment will be evident in the overall CPK as it dips in the months immediately after the new algorithm is released but then rises as keyword portfolios are adjusted until it reaches a steady state.

Methodology

The Performics 50 represents fifty actual paid search campaigns managed by Performics’ SEM experts using our proprietary DART Search platform. It was established in April of 2004 as a means of providing industry benchmarks among search engine marketing campaigns, based on the average number of clicks for the first three months of 2004. Each month after that, new campaigns are added only when campaigns previously in the index deviate significantly in traffic, again based on the average for the three months prior to that month.

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