Keyword Inflation. . . Is It a Bad Thing?

Advertisers and marketers are abuzz about dreaded keyword inflation, also called cost-per-click (CPC) inflation. More advertisers are entering the paid search market and those that are already in are spending more on their campaigns.

According to TNS Internet, advertising will increase by 13.4% in 2007 while traditional media ad spending will decline in some channels such as newspaper (- .9%) and spot TV (-2.8%). eMarketer predicts an increase of 18.9% in ad spending in 2007 and a 22.1% increase in 2008. The increase in spending can cause inflation.

Keyword inflation can also be caused by other factors. Chris Sherman of SearchEngineWatch.com predicted in July 2006 that keyword inflation would explode over the next few years, especially as big brands enter the online advertising market and try to protect their brand-related keywords.

Seasonal ad spending can cause temporary inflation. During the 2005 holiday season cost per click hit a high and then dropped in January but not to December 2005 levels. The same happened during the 2006 holiday season. Although reports with actual 2006 data are not out yet, I’ve seen this phenomenon with my own clients.

The costs of paid search advertising may be going up but the market is also changing and effectiveness is going up. Marketers are diversifying beyond the big three (Google, Yahoo, and MSN) to vertical search engines. Smart marketers are taking advantage of the search tools that specifically target a particular audience demographic by using geo-targeting, day parting, and by writing highly-targeted ads.

Consumer behavior is also changing. The Interactive Advertising Bureau suggests that consumers are now more likely to make a purchase or request additional information than in previous years.

Paid search campaigns had a special benefit for many retail companies this holiday season. Not only did consumers purchase products online, they also visited retail stores after clicking on online ads.

All of this tells me that we are in an exciting time for online marketing. It’s growing. It’s changing. It’s evolving. As with any campaign, daily monitoring of key performance indicators such as cost per acquisition, conversion rates, and return on investment is critical. Keep these numbers in line and enjoy the ride.