“Search’s efficiency has been exaggerated by the fact that its vendors simply don’t charge enough.” The claim, made by an attendee at a recent trade show, has been replaying in my head for the past few weeks. Sure, we all know and can prove that search is frequently more efficient and effective than other media, but could there be some truth in this statement?
Vendors know that search engine marketing, and pay-per-click in particular, can be a hard business. It’s not easy running a firm on what I’ve dubbed “The Incredible, Shrinking Management Fee.” So how did we ever get to such a place where a medium’s efficiency ultimately became its providers’ weakness?
When I think back on my own experience, it all started with the arrival of the 2003 Piper Jaffray & Co. report, “The Golden Search.” At the time, Safa Ratschy’s analysis served as required data for client pitches and venture capital road shows alike. Search was white hot, and all it took to prove it was a boilerplate slide with that little chart demonstrating that the cost-per-lead from search was significantly lower than the cost-per-lead from e-mail, yellow pages, banners or direct mail.
As the dollars started to pour in, existing search engine marketing agencies multiplied and scaled. And this is where the problem began. I have been known to state that any industry with more than three hundred competitors that do roughly the same thing will eventually consolidate. While this is happening before our eyes, there are some tough hold outs that are taking a different tact: the knife fight. This is exactly what Rob Murray, president of iProspect, and I discussed last week. “Clients have become increasingly price sensitive to paid search fees,” he said. While his employer was acquired by Isobar in 2004, he still must face serious negotiation with every new client. What we both know, however, is that despite this intense negotiation, the winner will still need to put smart bodies on the account, and this doesn’t come for free.
To further illustrate the scenario, an insider described losing a major deal due to a 0.5 percent difference in proposed management fees. In the larger scheme of things – the prospect being a billion dollar company – this expenditure is really quite small compared to the millions being thrown away on ineffective marketing. For the search engine marketing agency, that 0.5 percent would cover half of someone’s salary over the course of a year. The agency had to make a tough decision: either turn down the deal or operate at a loss.
Stuart Larkins, vice president of Performics, elaborated on this very point with me. “Search is so accountable and measurable that marketers think it is easy. It is a misperception that it is cheap.” As most of us in the trenches know, search is still very new and very time consuming. Labor costs are high, and from a technical standpoint, every new engine modification requires refining tools and processes. This is why his firm has focused on refining business processes as well as creating a uniform standard within its parent company’s DartSearch tool. In Larkin’s mind, the key is to learn how to scale like a mature firm, despite the fact that search engine marketing agencies are still a relatively new concept.
So what is next for the industry? Expect to see continued consolidation, with successful independents either diversifying their service offering or becoming increasingly more efficient at how they run their own businesses.