Is a Pay Per Click meltdown inevitable?

A report recently published by Forrester suggests that Pay Per Click bid costs have risen by an average of 33% in just 12 months. The "US Interactive Marketing Forecast, 2007 To 2012" surveyed click costs for the 1st quarter of 2007 and compared them to the 1st quarter of 2006.

This is no surprise to most online marketers who are facing an uphill battle to maintain the profitability of their PPC campaigns in the face of an explosion in the number of new advertisers over the last couple of years. Pay Per Click has become a widely used advertising tool and an established component of nearly every business's marketing plan.

So what does all this means for the typical PPC advertiser? For a start they will be getting 33% less visitors than last year for the same ad spend. More importantly, they will need to increase their conversion rates by 33% just to maintain the same campaign ROI.

The reason for this inflationary pressure is the continually increasing number of advertisers that have been drawn to the PPC model and, as a result, more and more advertisers are vying for the same limited search space.

This has been exacerbated by the fact that many companies have based their whole online business model on PPC advertising (especially Google Adwords), and they are being driven to bid higher and higher in a desperate attempt to maintain their prominent position for the most lucrative search phrases.

At the same time, many of the larger businesses that have traditionally dismissed search marketing as unnecessary have gradually come to the realisation that it is, in fact, a powerful sales and branding tool. These large businesses take a different economic approach to PPC advertising and are not necessarily playing to the same ROI rules as the smaller player.

So, not only does the online travel marketer have to deal with increased competition, they also have to deal with more and more campaigns that are being run unprofitably.

Many savvy businesses have managed to offset this inflationary pressure by ignoring the more expensive generic phrases and buying more 'long tail phrases' instead. These are longer and more specific phrases that generate lower search volumes, but they often produce higher conversion rates and are generally cheaper to buy than the more popular phrases. Many businesses are also implementing more sophisticated ROI measurement systems so that they manage their campaigns more profitably. Others have scaled back their PPC spend and started looking at alternative channels.

The big question going forward is how will continued click cost inflation impact on the future of search engine PPC as an effective advertising model? There is no doubt that Pay Per Click advertising has outperformed many other channels in recent years and there is enough margin left for ROI figures to decline further, and yet still be good enough for it to remain a profitable advertising tool.

Of course, there will be a 'tipping point' at which continued click cost inflation will render PPC as unviable for all but the most niche markets. Some commentators are already forecasting the imminent demise of PPC advertising due to untenable click costs and the increasing development of new advertising opportunities offered by the many social media websites. The highly popular Facebook has recently announced the launch of their own innovative new marketing platform called Facebook Ads (see below), and this will undoubtedly take advertising dollars from the traditional PPC platforms such as Google Adwords.

Despite the doom and gloom I still don't believe that the demise of PPC as an effective advertising medium is a foregone conclusion. It will certainly continue to get more challenging to make a PPC campaign profitable, and there will almost certainly be some kind of shake out eventually, but I believe that the outcome of all this could still be positive for many advertisers.

To explain the reason for my optimism we need to look at the key causal factors behind the current situation. There are many contributing factors to the continual increase in the number of businesses using PPC advertising. To a certain extent it has been a victim of its own success as many businesses have been drawn to the excellent returns that are possible.

Also, the increased popularity of affiliate marketing has spawned thousands of new advertisers all effectively selling the same product. This is particularly true of the hotel sector. But perhaps the biggest contributing factor of all is the simplicity of the management interface created by Google and, to a lesser extent, Yahoo and MSN.

It's relatively simple for anyone to set up and run a Pay Per Click campaign with very little knowledge or expertise, and this has encouraged many small businesses to enter the market without having to pay for outside assistance. For the same reasons, many larger businesses manage their own campaigns in house by delegating the responsibility to a person in the marketing department who may have no prior experience of PPC management.

However, the simple and intuitive management interface is deceptive and hides a sophisticated and complex marketing tool that requires a relatively high level of knowledge and expertise in order to get the most out of it. I am often shocked by the limited PPC service product knowledge of many business owners and marketing people that I come across, despite the fact that they control significant PPC spends.

This ease of entry to PPC advertising has not only fueled the increase in advertisers but I believe that it has also contributed to an increase in the number of campaigns that are poorly managed and, in many cases, unprofitable. As click costs continue to rise and returns decline many of these advertisers will simply fall by the wayside or drop out in order to look for more profitable marketing channels. Others will hand the management of their campaigns to experienced online marketers who will refocus their campaigns and make them more economically viable. Other advertisers will move part of their PPC budgets to new emerging online opportunities from social media sites such as Facebook.

Forecasting a PPC 'meltdown' might be a little too dramatic and 'rationalisation' is probably a better description. Either way, the end result of this process will be fewer advertisers and a higher percentage of profitably managed campaigns.

Creating and managing an effective search engine PPC campaign will still be challenging, but the smaller advertiser will have a better chance of realising a viable return.