Why Keyword CPCs Will Not Necessarily Fall

By Kaitlyn Smeland Dhanaliwala | Jan 8, 2009
More Articles by Kaitlyn

With the worsening economy affecting the e-commerce world in more ways everyday, some retailers may be tempted to hope that with less search volume for certain products they will be able to better dominate whatever demand remains.  This is not necessarily true, and here’s a conversation that illustrates the issue:

A friend of mine- an entrepreneur who has recently become interested in paid search advertising- recently told me he thought it was a great time for retailers to start engaging in PPC programs because keyword CPCs (cost per click) would start to fall as the economy worstened.  While I do think it’s a good idea for him to get involved in PPC because of the tangible data it will give him in determining ROI, his reasoning is not quite accurate.  And the reason is simple: Fewer potential customers will mean more competition among advertisers.

I asked him to imagine a simple supply and demand curve.  Usually when demand goes down, so does price.  However, in this scenario the supplier is not an e-retailer.  The supplier is the search engine selling space to those retailers.  Most retailers are well aware of the tightening market space and are preparing to optimize their marketing efforts, many turning exclusively to online avenues like search.  With this new competition among retailers to go after however many customers remain in their industry, demand (from retailers) for search listings will likely increase.  And as demand increases, so does price.  So CPCs will probably go up in many industries from just this effect.

Of course, the conversation in question actually occured at a party on New Year’s Eve and I don’t think this guy was too excited to chat about demand curves.  He responded that with more and more companies going out of business (as there may not be enough customers to go around), then maybe there wouldn’t actually be as many retailers to compete with after all.

And he had a point.

Only time will tell, and hopefully the damage won’t be as bad as many people are predicting.  But one thing is for sure: search still looks to be one of the most effective channels out there for many retailers trying to survive and stretch their marketing budgets this year.

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