Pay-Per-Click Advertising Becoming More Important?

Ten years ago a business could thrive by focusing on organic search engine optimization. My rule of thumb then was that organic rankings garnered roughly 80 percent of the clicks on search result pages while paid listings garnered less than 20 percent. A smart SEO strategy seemed to outweigh a smart pay-per-click advertising strategy.

A lot has changed in 10 years. Google’s propensity for changing organic search results has hurt many smaller retailers that relied exclusively on SEO for traffic and revenue. As a result, many of these retailers have started shifting more of their marketing dollars to PPC as they seek a controllable flow of traffic and revenue.

At the same time, Google has implemented a brilliant strategy — called “Quality Score,” which I addressed at “Pay-Per-Click Advertising: Six Metrics that Drive Performance” — to reward retailers to make their ads increasingly relevant to shoppers. Furthermore, Google conducts many of its own tests to find the optimal layout, formatting, and labeling of its paid ads to blur the line between organic listings and paid listings.

The result is that while retailers should still be able to generate more total clicks via their SEO efforts — versus their PPC efforts — PPC is rising dramatically in its importance. The traffic and revenue retailers can generate by optimizing and scaling the performance of their PPC marketing is higher than it’s ever been, and that’s a big deal that no retailer should ignore.

Actual PPC Click-Through Rates

I recently asked several of my pay-per-click managers to analyze Google’s “top vs. side” report — I wrote about that report previously, at “For Google AdWords, It Pays to be on Top” — to calculate an average click-through rate for PPC ads when they show on the top of the search results page. Here are the results from six merchants they surveyed:

• Merchant 1: 12.16 percent
• Merchant 2: 19.44 percent
• Merchant 3: 9.13 percent
• Merchant 4: 10.86 percent
• Merchant 5: 8.26 percent
• Merchant 6: 5.05 percent

Those click-through rates are likely as high as a merchant would expect from many of his or her organic, page 1 rankings. By the way, they are for non-branded search queries on campaigns that are well run and profitable over many months.

What, Exactly, Is ‘Profitable’ Traffic?

Clearly, PPC can send a lot of traffic relative to organic listings. But is it profitable traffic? Sometimes it is, and sometimes it isn’t. When it’s not, many retailers blame the inherent nature of PPC for campaigns that they perceive to be unprofitable. But I always advise to check your perceptions.

Since PPC has the potential to send a lot of traffic quickly, it can expose fundamental flaws in an online retailer’s business or marketing strategy. If your prices are too high, your campaign isn’t managed well, your website’s usability stinks, your products are out of season, or the buying cycle for the products you sell is long or complex, then of course PPC won’t perform optimally. Try addressing those issues before deciding that PPC can’t work for you.

In addition, there are circumstances when smaller retailers should consider adjusting their expectations for their PPC campaigns. Quite often the expectation for a PPC campaign should be a steady flow of profitable traffic that results in a high return on ad spending. There are times, however, where retailers should think more like bigger retailers — if they hope to become one.

The Lifetime Value of a Customer

Larger retailers treat the first sale they make to a new customer as an invitation into their customer’s home. Once they get that first sale, their marketing machine goes to work, and they focus on increasing the lifetime value of that customer. They use a combination of email marketing, loyalty programs, and on-site personalization to generate repeat business from their customers in a way that changes their economic model for PPC.

If smaller retailers pay $30 in PPC advertising fees for every $40 in related PPC sales, they may conclude that PPC cannot be profitable for them. If over the course of a year, however, they can generate an average of $500 in sales from customers acquired through PPC, the entire profit picture would change drastically. Suddenly the retailer would be in a position to throttle up its PPC budget in a way that could support significant ongoing revenue growth.

If you decide to test a PPC strategy that focuses on the acquisition of profitable customers (a longer-term strategy) rather than on the immediate acquisition of profitable sales (a shorter-term strategy), proceed with caution. Such an approach requires strategic thinking and masterful execution. It requires that you or your team adopt a data-driven mindset where you are constantly testing and evolving.

Conclusion

Google still generates the overwhelming percentage of its revenue through AdWords. To continue delivering strong year-over-year revenue growth, Google will have to find smart ways to divert more search traffic to its PPC ads. As more traffic flows through these ads, PPC’s importance to online retailers will continue to grow.