Up, Up, And Away

Search ads are getting too pricey

For years, running small text advertisements on Web search engines brought a profitable stream of new customers to 26-person BabyAge.com. But last year, search ads suddenly turned sour for the $20 million online baby products store. Even as BabyAge's ads drew more clicks from potential buyers in 2006, they netted fewer sales, effectively doubling their cost. "We're out of business at this rate," fumes Chief Executive Jack Kiefer. As a result, he plans to cut back on search ads this year.

Kiefer isn't the only one casting a newly skeptical eye on what has been the fastest-growing ad market on the Internet. He's joined by online retailers such as 100-person jeweler Ice.com and 98-person eBags, among others. Search ads, which run alongside query results on Google, Yahoo!, and other search sites when someone types in "diamond necklace" or "DVD player," have been the marketing weapon of choice for these companies because the ads reached targeted audiences and could be measured for effectiveness. In the third quarter of 2006, the price per click for these companies' search ads rose an average of 31% from a year ago, says DoubleClick.

What's going on? It's the fallout from a new online land rush. Giants from Best Buy to Zales are diverting more of their marketing budgets to search ads. In the process, they're driving up prices and muscling out at least some of the entrepreneurs that have always bought the bulk of the ads—and stealing shoppers from small businesses.

Google and Yahoo maintain that entrepreneurs with the right products and messages can still trump big brands online. "We're not seeing any erosion of roi [return on investment] across the board by our customers," says Richard Holden, Google's director of product management for advertising.

Some entrepreneurs are adjusting by buying far fewer keywords and phrases. BabyAge's Kiefer is axing expensive keywords like "car seat" and instead opting for the less pricey-per-click "Britax Roundabout," describing a specific product. That phrase nets much less traffic but brings in more sales per click. Other merchants are looking beyond search entirely. With some of his favorite keywords now costing up to 80% more than a year ago, "you really have to look at other marketing venues," says Peter Cobb, eBags' senior vice-president of marketing. His company, with $80 million in annual revenues, is mulling advertising on blogs and niche shopping sites such as Like.com and Etsy. And he may begin experimenting with, of all things, local radio and print ads.

By Robert D. Hof

    Before it's here, it's on the Bloomberg Terminal.