Why Search Spend is Down 8% in Q408

Efficient Frontier, a company I know very well from my Fathom days, issued a report that said spending on search advertising was down in Q408. Alley Insider had a take about the implications but did not surmise why search spending unexpectedly declined in Q4. I thought I would give it my best shot.

The answer is actually simple: Conversion Rates are down.

In my experience, minute changes in the conversion rate can cause significant downward pressure on keyword prices (and spending). At Fathom, we saw it over and over again with clients such as mortgage brokers -- when housing interest rates would marginally rise, mortgage applications would slightly decrease, and keyword cost per clicks would plummet.

In a recession, it is natural that conversion rates would decrease for any type of retail (including ecommerce) and the holiday retail figures confirmed that sales were down.

Keyword spend had to decrease as marketers realized that conversion rates were not delivering the desired ROI. With ecom marketing, ROI is the driver of spend and no ecommerce marketers wants to pay for visitors - they only want to pay for customers.

And because search is so ROI-centric and so easily measured, it is actually exposed to this type of decisioning more so than a lot of other media. Probably why Google was smart to go into this recession warily.