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Keyword inflation, low conversion rates sending merchants elsewhere
By Ben Charny, MarketWatch
SAN FRANCISCO (MarketWatch) -- A growing number of online advertisers are bidding a partial goodbye to Google Inc.
Frustrated by the soaring price of Internet-search advertising and
diminishing returns from the ads they buy, mid-sized advertisers say
they plan to reduce how much business they do with Google this year --
in some cases, significantly.
Last year, for example,
eBags.com co-founder Peter Cobb spent between $5 million and $8 million
to peddle suitcases, handbags and other carrying cases online. Google
got 75% of that amount.
But this year it will get "significantly less," Cobb said. "The Google percentage has got to go down," he said.
In many cases, the cost of an eBags.com ad placed on either Google's
own Web site or one of its affiliates now equals 45% of the price of
the product it promotes. That's crimping the company's own profit
margins and forcing it to look elsewhere to market its bags.
"We're testing print ads right now," said Cobb, whose company will spend up to $8 million on ads in 2007.
Cobb was among a half-dozen Google customers -- all of whom spent
between $4 million and $10 million on search ads in 2006 -- who told
MarketWatch they plan to spend less this year to have their ads placed
alongside Google's search results.
While losing a few million here or there may not be enough to impact
Google's business -- which generated more than $7 billion in sales last
year -- those interviewed for this story say their sentiment is not
unusual among Google advertisers of their size.
If enough of those companies curtail their Google spending, it could
begin to depress the company's annual revenue growth rate, which is
already expected to slow to 47% this year from 80% in 2006.
That growth rate is one of the primary reasons that Wall Street analysts cite to justify their price targets on Google shares.
Google is aware that advertisers are closely measuring the return on
investment and "adjusting their budget and pending patterns according,"
Google spokesman Michael Mayzel said in an e-mail.
"As with any advertising medium, some advertisers are going to perform
better than others," he added. "The majority of our customers continue
to see strong return and value in our ad program."
New bidders driving up prices
To a large degree, the dissatisfaction with Google's advertising is due
to the phenomenal success the company has had in persuading other firms
to advertise their products and services using Internet search keywords.
In search advertising, companies bid on the right to have their
text-based ads placed next to search results generated by specific
words and phrases, such as "ski boots" or "diamond earrings," that
Internet users type into Google's search engine.
The low cost of keyword search advertising relative to older media like
television, radio or even local yellow pages has lured many traditional
retailers into advertising online. That's created more competitive
bidding for popular Internet search terms, inflating their cost.
While that's helped Google post phenomenal profit growth -- analysts
expect that its net income rose 80% in 2006 -- it's made things tougher
on many of its advertisers.
Keyword
search prices on many terms rose between 40% and 60% last year,
according to advertisers like Dan Sackrowitz, chief executive of Bare
Necessities, which sells lingerie online. He saw his Google ad budget
soar 50% last year.
Jack Keifer,
chief executive of baby goods provider Babyage.com, said his search ad
costs more than doubled in 2006. As a result, he's refining his online
advertising strategy, spending less on Google and more on comparison
shopping engines or niche search engines that focus on his product
categories.
The experience of
Sackrowitz and Keifer has come to the attention of Wall Street
analysts, even those who are bullish on Google.
"What has been good for Google has not been good for the companies that
buy advertising from them," said Mark Mahaney, Internet analyst at
Citigroup who rates Google shares as a buy. "Going forward, we see no
convincing reason why online advertising costs shouldn't continue to
rise."
Trouble turning shoppers into buyers
Meanwhile, there's also growing dissatisfaction with the return on investment provided by Google ads.
Advertisers pay Google every time someone clicks on their online ad,
yet they benefit only if a consumer buys something after being
transferred to their Web site.
Most online advertisers are happy if their so-called conversion rate is about 5%.
Yet Shmuel Gniwisch, founder of online jeweler Ice.com, got a
conversion rate of less than half a percent for the $750,000 worth of
ads he placed through Google during November and December, a key
selling season for retailers.
For every 300 people who clicked on an Ice.com ad, only one actually purchased something, Gniwisch said.
"You couldn't get a worse performance," he said.
As a result, he's planning to cut his Google ad spending by 40% or more.
The low yield is a reminder of how many clicks are not legitimate but
rather the result of so-called click fraud. While Google officials have
inferred that the fraud rate is in the low-to-mid single digits, some
critics say it can be as high as 50% for some online ad campaigns.
Changing tactics
Likewise, not all Google advertisers who've seen their costs surge are cutting spending.
Google's expansive advertising network and its No. 1 Internet search
engine still make it a necessary part of any online campaign. Saying
goodbye to Google and its huge audience is a risky move for advertisers.
Yet even those who will spend at least as much money on Google this
year as they did in 2006 say their decision has more to do with
improvements they've made on their own, rather than any increased
satisfaction with Google's ad service.
Sackrowitz of Bare Necessities said he won't cut Google spending, but
only because his company has developed expertise in converting clicks
into sales.
"We're getting healthy
enough returns, but it's a testament to how we've done a better job of
converting shoppers to buyers than our competition," he said. "We'll
stay the course, but I wish (keyword) prices were lower." 
Source: http://www.marketwatch.com/news/story/google-advertisers-cut ting-spending-keyword/story.aspx?guid=%7BE9B9CEA8%2DEA47%2D4 8C6%2DA91F%2D69F53F018AE2%7D
Edited by: MartinGarcia - Jan. 05 2007 at 2:14 AMMartin Garcia
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