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Maturation of Paid Search – End of Free Lunch

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There’s certainly been a lot of noise being generated by medium-sized companies, complaining they’re no longer getting the same ROI from paid search – especially from Google AdWords.

I’ve been taking a look at the trends and believe this is simply the continuing maturation of the paid search channel. Here’s how it’s developed thus far.

  • Stage 1 – Medium and Large companies spend huge amounts of money on banner ads. Small companies can’t compete, so they start experimenting with paid search and get great ROI with little effort.
  • Stage 2 – Medium companies start experimenting with paid search. Their campaigns are not very targeted but they’re able to get great ROI with little effort, so they start pumping in more money. Meanwhile, the small guys find that they can no longer compete for generic keywords, so start targeting the “long tail” and find there are great returns to be had from more targeted keywords.
  • Stage 3 – Large companies enter the paid search channel. They don’t spend a lot, as they are not convinced of the benefits. “Where’s the branding?” they ask. Medium companies start fine tuning their ads, work with landing pages, but still compete for the more generic keywords. Small companies have the long tail to themselves, they’re multi-variable testing, switching campaign creatives and getting great ROI from hard work.
  • Stage 4 – currently – Large companies are dumping huge amounts of money into paid search, but still with little measurement or fine tuning. Medium companies no longer have the budgets to compete with the ever-increasing bids, driven up by the larger companies’ ad budgets. They start complaining that they’re no longer getting the ROI and threaten to pull back paid search budgets. Some even go crazy and suggest they’ll spend it on television!
  • Stage 5 – the evolution in 2007 – Medium companies will discover that they need to be more aggressive with their campaign management and explore the “hidden” keywords known only to those marketing the long tail. There, they find lower CPCs and better targeted visitors. Small companies get crowded out and start exploring social media marketing, SEO, viral campaigns and locally-targeted search ads. Large companies realize they can’t afford to compete against each other’s monstrous budgets, and start backing off on their paid search spending, before finally discovering the long tail. Growth in the paid search space starts to slow as small, medium and large companies start becoming more savvy with their ad spend and other mediums start offering lower CPAs.

Bottom line? The “free lunch is over” and that’s exactly what I told Business Week, in this week’s edition.

So, that’s my analysis. Where are the gaps, what did I miss? I’d be dissapointed if there wasn’t at least one person who comments; “Andy, you got it all wrong!”. :)

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Andy Beal is an internet marketing consultant and considered one of the world’s most respected and interactive search engine marketing experts. Andy has worked with many Fortune 1000 companies such as Motorola, CitiFinancial, Lowes, Alaska Air, DeWALT, NBC and Experian.

You can read his internet marketing blog at Marketing Pilgrim and reach him at andy.beal@gmail.com.

Maturation of Paid Search – End of Free Lunch
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