EF Report: Higher CPCs Signal Stronger Search Ad Market

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Companies in retail, travel and auto industries dug into budgets during the second quarter in 2010 to spend 24% more on paid-search ads overall, compared with the prior year, and 9.7% sequentially, according to the Efficient Frontier Q2 2010 Executive Summary released Tuesday.

The report points to higher cost-per-click (CPC) prices, which rose across all of major search engines as a contributing factor to a recovering market. Return on investments (ROIs) also rose 4% in the quarter, compared with the prior year, and 10.6%, sequentially. Search marketing growth continues to exceed the 2010 outlook of 10% to 15% uptick.

Advertisers might have spent up to 12% more this quarter for the cost of a click, but Sid Shah, director of business analytics at Efficient Frontier, calls it a positive sign for the industry. It means paid- search advertising will become more competitive. "That happens when there's money to be made," he says.

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Search marketers looking for a recovery might want to know the retail sector spent the most for online search advertising in the second quarter in 2010, but it doesn't mean that consumers made more purchases online. Retailers spent more to keep up with rising CPC rates.

The retail sector leads with 38% growth in spend, year-on-year, and 16% growth, sequentially. Retail CPCs continue to grow at 18% YoY and 17% sequentially. Consumers played a part in driving the recovery. Impression volume in the retail sector rose 65% YoY.

Shah says the price of the clicks cost more because of conversion rates, which rose 18% in the quarter from the prior year. The key for retailers is to find ways to increase conversion rates, which drive higher revenue, then use profits from higher revenue to spend more. U.S. click volume increased 5% in 2Q, compared with the quarter in the prior year.

"This is the first time in a long time we have seen quarter-on-quarter growth and higher CPCs in travel," Shah says.

Travel has begun to rebound, but it's not clear whether it will become long-term, Shah says. Travel spend rose 10% YoY on CPC gains. The auto sector continued growth with a 6% YoY increase. The Finance sector declined 2% for the quarter, despite a 22% YoY decrease in CPCs. This is because click volume grew 24% YoY and offset almost all of the losses from the drop in CPCs, according to the report. Auto also rose 6% YoY on CTR and CPC gains.

YoY spend has grown 24%, while ROI increased 4%. This positive sign continues from last quarter when Efficient Frontier reported similar numbers. Positive ROI indicates there's room for higher spend. The increase in spend is due to an uptick in pricing. Clicks dropped during the quarter on Google and Yahoo, while CPCs increased on all the major search engines.

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