SEM spend hits $9.4B

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Advertisers spent $9.4 billion on search engine marketing in 2006, further cementing the channel's position at the head of all online advertising.

The 62 percent increase over 2005 SEM spending is according to the Search Engine Marketing Professional Organization's State of Search Engine Marketing 2006 report. SEMPO researchers project ad spend will reach $18.6 billion by 2011.

"The key findings of the survey are that search marketing has become increasingly important to marketers, including visibility of search higher within the advertiser's organization," said Kevin Lee, executive chairman and co-founder of New York's Did-it.com. "It's great to see that search is increasingly on the radar of the C-level executives."

Radar Research and Intellisurvey conducted the study among 587 agencies and in-house advertisers in November and December. Seventy-five percent of advertisers use tactics for improving a Web site's organic search results, making it the most popular form of SEM. Paid placement came in second, with 71 percent of advertisers using this marketing channel.

Paid placement was about 86 percent of total ad spending, meaning that $8 billion was spent on paid search. Organic search optimization accounted for $1.1 billion, a mere 12 percent of ad spend. Paid inclusion continued to creep downward this year, accounting for only 1 percent of total spending, or $94 million. The remainder of ad spend, $122 million, went to SEM technology platforms. "One shift from previous years is that direct sales is now as compelling an objective for SEM spending as brand awareness," the report said.

Fifty-eight percent of survey respondents said direct sales motivated their SEM spend, followed by brand awareness at 57 percent. "Despite the emphasis on branding as a top objective, advertisers gauge success by performance metrics," the report said. Less than 25 percent of advertisers track branding impact, while 73 percent track the increased traffic volume, 71 percent measure conversion rates and 68 percent track click-through rates.

"Marketers should take away from the study the fact that their competition is likely embracing SEO and [pay per click] search more every year as a critical part of an integrated marketing plan," Mr. Lee said. "That means increasing competition for placement both in the organic and paid results."

Among the major players, Google remains the market leader, as 96 percent of search marketers use Google AdWords. More than 86 percent of advertisers have run campaigns on Yahoo Sponsored Search. MSN reportedly has made a comeback, with 68 percent of respondents using it, up 29 percent from the previous year.

Like any industry, SEM faces challenges. Improving the search industry, monetizing multi-word search phrases, increasing transparency and reducing complexity are among those cited in the report.

Advertisers and agencies are approaching their pricing limits. Almost two-thirds of respondents thought keyword pricing has swelled this past year, and three out of four advertisers say they could still afford an increase in keyword pricing in 2007. Twenty-five percent claimed they were at maximum efficiency.

"Yet even among advertisers who report the capacity to increase their ad expenditure, the vast majority can only absorb increases of less than 30 percent," the report said. "Despite increasing ad spend and year-to-year growth in the value of paid placement, we are likely nearing a pricing plateau as advertisers near their maximum efficacy."

Thirty-six percent of advertisers surveyed said that their funding for paid placement and natural search came from budgets that were created in 2006. These advertisers also said that they are allocating funds for SEM from offline marketing channels like print magazine ads (20 percent), direct mail (16 percent), television ads (13 percent) and print newspaper advertising (13 percent).

"Advertisers and agencies are experiencing similar trends in overall pricing, but there is greater disagreement than last year over pricing," the report said. "Almost three-quarters of advertiser respondents felt that prices for their common keywords rose in the past 12 months, and 100 percent of agencies thought prices went up."

When asked about paid placement, 17 percent of respondents did not know whether they were paying more in 2006 versus the previous year. Agencies, on the other hand, think they are experiencing small price increases more than advertisers do.

Improving the efficiency of programs before cutting back on spending, improving site conversion efficiency and improving the overall efficiency of bidding programs would be advertisers' first steps to ensure their paid placement programs continue to turn a profit.

"Marketers must educate themselves on best practices in SEM regardless of whether they are going to rely on external vendors for services and technology or manage and build technology in-house," Mr. Lee said.

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