January 31, 2008, 12:00 AM

SPONSORED SUPPLEMENT: How to find the payoff in search marketing

As more retailers turn to paid search, keyword prices are soaring and the hefty return on investment that retailers once enjoyed on many keywords is shrinking. At the same time, this trend has made many peripheral keywords marginally profitable or unprofitable. In some cases, keyword prices have soared so high that retailers are getting priced out of their top choices and are left scrambling to identify and purchase alternative words that generate sales.

“One client has seen the price of the category keywords it buys on Google rise 55% to 60% since 2005,” says Udayan Bose, founder and CEO of Princeton N.J.-based paid search marketing firm NetElixir Inc. “The overall cost per click of paid search is making it harder for retailers to achieve the same ROI they did a few years ago and in some cases is becoming cost prohibitive. Success in paid search requires a highly thought out strategy.”

But rising costs are not a reason to throw in the towel on paid search. Instead, retailers can get more mileage out of their existing paid search budgets by closely managing the ROI of keywords and looking for alternatives. More often than not, about half the keywords in a search manager’s dictionary are marginal or poor performers. This glut of underperforming keywords is often the result of retailers building keyword dictionaries without testing keyword performance.

Striking the balance

“A lot of retailers blindly build and bid on dictionaries of 10,000 or more keywords before they test ROI on these words,” Bose says. “From the outset, the focus needs to be on determining the value of the keyword and where it fits into the overall advertising and marketing strategy to strike a balance between visibility and sales, instead of randomly adding keywords.”

Bose recommends starting with a dictionary of 1,000 to 2,000 keywords, testing them rigorously and expanding the dictionary based on results and new keywords that are identified from testing.

Paying more than expected for keywords is fast becoming a cost of doing business and retailers that shy away from the cost will erode the effectiveness of their paid search strategies, especially when trying to maintain a good quality score. “There are certain keywords for which retailers need to be known, especially at certain times of the year,” says Suzy Sandberg, president of PM Digital, a New York-based direct response online marketing firm.

For example, retailers of summer wear ought to be purchasing such keywords as “shorts” and “swimwear” in late January and February as they roll out their spring catalogs and resort wear becomes a key focus. “That’s when shoppers begin looking for those items and those keywords are hot,” says Sandberg. “Then there are the keywords for products that the retailer is most closely associated with and sells year round. Knowing which keywords perform well and when is essential to bid management, as is isolating marginal keywords or seasonal keywords and activating them accordingly.”

Determining the real ROI

One point retailers need to keep in mind at all times when bidding on keywords is that some retailers are determined to purchase top ranked keywords regardless of price.

“In a bid environment, the price per click is going to escalate and the projected ROI might not be as good as desired or what it was in the past, but retailers can’t lose their perspective,” Sandberg says. “Until the quality score is achieved, it may take a few weeks to determine the real ROI on that keyword and how well it performs in relation to the overall objectives of the campaign. If after a few weeks a keyword doesn’t meet sales projections, but it brings in new customers, that attribute is of value.”

Understanding the profit margins of the product being advertised can also help retailers determine how much they can realistically bid on a keyword. “Retailers need to consider their profit tolerance and set tolerances by category, but know they can get more aggressive at times and remain within their tolerance,” says Robert J. Murray, president of Watertown, Mass.-based search marketing firm iProspect.com. “Retailers can bid aggressively in some categories knowing they’ll make it up on volume in others.”

In a survey of 794 search marketers conducted in 2007 by JupiterResearch on behalf of iProspect, 88% of respondents measure the ROI of search campaigns, up 11% from 79% in 2005 when the survey was last conducted.

The study also found an increase in search marketer campaign performance evaluations tied to total sales, return on advertising spend, and ROI. Performance evaluations tied to total sales increased 16%, performance evaluations based on return on advertising spend increased 13%, and performance evaluations tied to ROI rose 6%.

Understanding profit tolerance

“Retailers need metrics on the performance of the entire campaign, not just sales generated, to determine the value of the keyword in relation to its costs,” Murray says. “Performance metrics will vary by product category and SKU. It’s important for retailers to remember they can get aggressive at times in keyword bidding and still remain within their overall profit tolerance, but they need the overall campaign metrics to know their tolerance and have the necessary control over keyword bidding.”

The key to success in paid search is retaining control over keyword bidding as bidding wars often break out over the most popular keywords. Retailers that have tested the value of keywords and their contribution to overall sales are better prepared to avoid being drawn into bidding wars that decimate their ROI.

“Effective keyword bidding is a matter of best practices that come with applying data analysis and data modeling to keywords to select those clicks that will deliver the most value,” says Kevin Lee, executive chairman of Didit.com, a New York-based online advertising and marketing firm. “Cluster analysis and data modeling enable retailers to cherry pick the keywords, time of day, and geographies so that messages can be tuned to meet shoppers’ needs. Without dayparting, for example, retailers may bid the right price on keywords only a couple times a day.”

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