Paid Search Advertising to Grow 10-14% in U.S. This Year: Here’s What That Means to You

Posted on Apr 22, 2011 in Advertising | 0 comments

By Craig Macdonald, CMO and SVP for Products, Covario, Inc.

For the past two years, the question has been when advertisers will start to lessen their investments in paid search advertising and start diverting it to the high growth social media space and take advantage of the recent spate of innovations in display advertising – retargeting being the most obvious.

The most recent study by Covario shows that growth in paid search advertising remains very healthy – particularly in the high tech and consumer electronics markets, in which the firm specializes. Advertisers upped their spend by 26% from the first quarter of 2010 to the first quarter of 2011 in paid search, and for the first time in five years, actually increased their spending from the fourth quarter of the previous year – spending was up 6% over the fourth quarter of 2010.

Why is this happening? There are a couple of reasons. The majority of this growth is coming overseas. In fact, growth in the U.S. was relatively small – only 8% over the previous year.  However, advertisers have upped their European and Asian spending rates by nearly 50% from the same time in 2010. That is huge growth. Most of our advertiser clients have matured their international execution capabilities and are now taking advantage of these improved processes to buy far more aggressively overseas.

Why are growth prospects so good overseas? The markets continue to be relatively unsaturated and there is increasing usage of search for B2B buying cycles in these markets. Also, the cost of performing paid search advertising in the U.S. is increasing. Covario saw a 7% increase in the average cost per click that advertisers are paying in the U.S. between December 2010 and March 2011. So the increases that U.S. advertisers put into the market went entirely to paying more for clicks, not driving additional clicks. CPCs (costs per clicks) are increasing due to increases in competition and due to processes being used by the search engines to better monetize their inventory – i.e., to get advertisers to pay more for the same clicks.

The other major reason that search advertising continues to enjoy such robust growth is that other forms of digital advertising continue to underperform. Social advertising, which realistically today really means Facebook, offers a tremendous amount of audience potential. However, it continues to underwhelm except in the most specific circumstances. Covario clients are spending the equivalent of 10-20% of their paid search budgets on Facebook advertising and we see decent results – but the budgets are still relatively small. As for other forms of social advertising, they tend to focus on local advertising (Foursquare) or the mechanics continue to be a work-in-progress (Twitter).

And as for display – which represents about 35% of overall digital budget for most large advertisers – the promise of next-gen retargeting technologies and ad-exchanges continues to be slow to deliver. Standard display advertising continues to have very poor return dynamics, and retargeting (identifying consumers who express interest and targeting ads to them over and over) has a very small overall potential (usually only 10-12% of the overall display inventory is subject to retargeting). Ad exchanges are offering secondary inventory, as primary inventory is still tightly held and divvied out by the publishers.

So the forecast for paid search advertising looks promising. As such, advertisers must expect that in the U.S., CPCs will climb rapidly, making the ability to attract additional traffic potentially economically untenable. The growth will be overseas, and it will be robust. Covario expects overall growth to be 10-14% in the U.S. in 2011, 20-25% in Europe, and 30-35% across Asia in 2011. Advertisers that do not target budget increases of similar size will likely lose market share from this key advertising channel.