• by dave.b , Max Kalehoff , December 11, 2009

Performance-based advertising, particularly search, is poised to lead the eventual recovery in online advertising. Considering search advertising's dominant role in our industry, especially during this holiday retail season, I thought I'd share some analysis my colleagues and I recently conducted.

 

One of my favorite things about our start-up is the real-time insight provided by our platform, where thousands of marketers manage their online advertising investment. We regularly analyze our customers' spending patterns to gain insight into marketplace trends. What we learn influences what we build, and, importantly, it allows us to contribute to our collective understanding of the advertising industry.

Our latest analysis is an end-of-year review of the search advertising landscape -- from which I include highlights below. These directional insights are derived from actual spending on our platform: a community that comprises thousands of search advertisers, including small, midsize and sub-enterprise businesses, as well as advertising agencies.

Search Budgets in Q4 2009 Relative to Q2 and Q3
Compared to the average of Q2 and Q3 2009, search budgets in Q4 are up as much as 30%, with the highest increase in retail and electronics. Even non-seasonal services like financial services are up as much as 15%, suggesting a more fundamental shift in spending. Notable sector gains include: retail: +30%; travel: +20%; services/legal: +20%; services/insurance: +15%; auto: +10%.

Seasonal Spending Recovery
In November, overall search spend was significantly higher (+25%) than in September, though only slightly higher (+5%) than October. This reflects seasonality yet also correlates with recent improvements in the economy. It also reflects cost-per-click (CPC) spikes, as advertisers spend more to meet competition, protect their brand keywords and offload end-of-year budgets.

Q4 Cost Per Click and Paid-Click Growth
CPCs and paid clicks are both increasing in Q4, though the rate of growth varies significantly across industry sectors. Increases are ranging from 5% to 40%, with the most aggressive spikes, not surprisingly, in the retail sector.
CPC and paid-click growth are influenced heavily by two factors:

• Natural Demand And Competition: In addition to seasonality, advertisers want to spend more as the economy recovers as well as offload end-of-year budgets. 
• Search-Engine Influence: Search-ad networks often do things that drive CPCs up, such as introducing new first-page bid rules and quality-score refinement. Furthermore, the introduction of Bing has changed the dynamic of the Microsoft and Yahoo competitive landscape. (More on Bing below.)

Microsoft, Bing Gaining Momentum
In Q2 2009, only 7% of all ad-network accounts we managed were Microsoft, representing 1.7% of total spend. However, nearing the close of Q4, the number of Microsoft network accounts managed on our platform doubled to 14%, while overall spend doubled to 3.4%. In our eyes, this increase in the Microsoft distribution is one of the first significant signs of a power shift from Yahoo to MSN. Google, on the other hand, doesn't seem to be affected. Nonetheless, advertisers shouldn't pull out of Yahoo, as it is still a massively popular search engine. But as some advertisers do move away from Yahoo, decreased competition may present new opportunities for other advertisers to succeed on that network. With Bing making headway, it becomes increasingly clear that the time and resource investment in second- and third-place networks can be justified by the returns.

CPC Outlook 2010
CPCs will likely increase, along with paid clicks, in 2010. If so, key questions arise: Will advertisers absorb that traffic and spend increase, or place arbitrary budget limits? Will they expose themselves to additional traffic that may or may not benefit conversion and return? We believe thinner retail profit margins will heavily influence overall ad spends in 2010.

How do these trends compare with your search marketing investment and outlook?

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