• by Ross Fadner , October 12, 2004

Because its ad costs fluctuate dynamically based on rapidly changing demand for key words and terms, paid search is considered among the most volatile markets in the advertising marketplace. Now new data reveals exactly how dynamic it can be. Within the same period of time - the month of September - the average cost per click for a key word can index as low as 32 cents to as much as $3.17 depending on the advertising category, according to estimates from a new index being released by search marketing firm Fathom Online and MediaPost.

The index, which Fathom has dubbed the Keyword Price Index, or KPI, is derived from a composite of the 500 most queried words or terms in eight industry sectors: automotive, retail, consumer services, travel/hospitality, finance/investing, finance/mortgage, telecommunications/broadband, telecommunications/wireless. The index itself is a weighted average of bid prices of the top five ranked positions across U.S. Tier I, II, and III search engines.

The index is intended to serve as a base for comparing the relative cost effectiveness of search engine marketing (SEM) campaigns. Going forward, it will track the fluctuations in cost per click (CPC) over time.

MediaPost will publish the index monthly and will begin reporting monthly sequential trends with the October installment. Beginning next year, the index will show year-over-year trends.

Fathom Executive Vice President Matthew McMahon, noted several questions he hopes the ongoing study will provide answers to, including the effect the increase in queries has on bid prices and how that affects the way advertisers manage campaigns. McMahan said it will also be interesting to see the effect the fourth quarter holiday season and the new year will have on pricing.

McMahon said notable surprises for the first installment were the Telecommunications/Wireless and Consumer/Retail categories. He said that clients have said that they have said that they don't want to pay more than 15-20 cents for leads in the Retail category; 32 cents is too high he said. The average for the cluttered Telecom-Wireless industry was also too high at $1.09, McMahon said. "The conversions don't bear out to justify those CPC rates," he said.

The Finance/Mortgage category, at $3.17, averaged the highest CPC rates, but McMahon noted that likely reflects the relative market value of financial leads. "You can make a lot of money selling a mortgage. The margins are high there, so these advertisers are willing to pay more for leads," he explained.

He said the same is true for the Automotive category. "If you get a qualified lead for $30, that's a good investment. All you need is to convert on one out of 60,000 to break even from that perspective."

One trend McMahon said he could already see in compiling the first installment of KPI is that by the end of the month, prices tend to go down. He said this is probably because advertisers tend to run out of budget by the end of the month.

The keyword composite excludes brand names or product names, international-related terms or international bid prices. Also, bid prices for the top 80 percent of search queries will be considered representative of sector cost. There is a cut off point because the bottom 20 percent adds a cost of 1/1000 of a cent to the overall bid price, according to Fathom. Each quarter Fathom will reevaluate the keyword list to ensure its relevancy to the sector.

The weight of each search vendor is based on the tier system. For example, Overture has a higher market share than FindWhat, so Overture CPCs, as a tier I search engine, will be weighed into the averages more heavily.

Fathom Online Keyword Price Index (KPI)

                                September 2004 
Automotive                               $1.54 
Retail
$0.32 
Consumer Services                        $0.54 
Travel/Hospitality                       $0.64 
Finance/Investing                        $1.76 
Finance/Mortgage
$3.17 
Telecommunications/Broadband             $1.89 
Telecommunications/Wireless              $1.09 

Overall Average                          $1.37 

Source: Fathom Online. Indices are based on a weighted average of bid prices of the top five ranked positions across U.S. Tier I, II, and III Search vendors of keywords within an SEM campaign. The industry keyword list is composed from the 500 most queried keywords within an industry. The keyword lists does not include brand keywords. The KPI's goal is to represent a typical SEM industry campaign and track the cost per click (CPC) over time without being subjected to abnormal search activity due to random events regarding well-known industry brands.