Like Swimming with Sharks: How Online Retailers Can Fish Out Search ROI

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When it comes to paid search, few online vertical marketplaces are as competitive and cutthroat as Retail. Because the sales process is completed online, the number and revenue value of conversions is immediately known. This situation is an ideal fit for paid search because the marketing costs are also immediately known. This allows retailers to become laser-focused on ROI.

Search is still the great equalizer, allowing small, unknown brands to compete with huge, household names in the selling of their products. This phenomenon has produced an enormous number, and variety, of online retailers.

It seems no matter what you’re looking for online, there are at least a couple of online stores that specialize in the product you seek. Recently I was searching for home theater gear to find a wall mount for a flat screen television. No problem. In a matter of seconds, I found MountsAndMore.com. Then, I searched for cables to connect the speakers to the receiver. Again, no problem, MyCableMart.com popped right up.

The net effect of this proliferation of online retail sites has been fierce competition. This is true across all verticals, and the overall effect has been rising cost per click prices across the PPC engines. But the retail vertical marketplace is particularly interesting because the rising costs per click have been less pronounced than those of most other verticals. Why? Simple: retailers focus more heavily on ROI than marketers within other verticals, they know their ROI very precisely, and a retailer can only afford to pay so much to acquire a customer. When their costs per click get so high that their ROI is zero, they can’t bid any higher.

To investigate the current state of ROI in the retail space, I obtained conversion rates for three retail-related verticals (data from Fireclick). Then I selected a set of ten broad keywords for each vertical and checked their maximum bid prices in Yahoo!. I took an average of these bids (throwing out a couple that seemed irrationally high) and used the average conversion rate to come up with a cost per conversion that the bidder in the first position is willing to pay. The results for each vertical’s cost per conversion are listed below:

-Fashion Apparel – $26.89
-Electronics – $48.14
-Outdoor/Sporting Goods – $79.11

Eye popping, eh? How many golf balls would you need to sell to afford $79.11 in PPC costs alone, never mind shipping, handling, the cost of goods, etc.? The intention of this little exercise is to demonstrate that retail is a tough market in paid search. If you’re just jumping in, you’re swimming with sharks. However, I don’t believe that the bidders in position one on the sporting goods keywords are actually paying that much for a conversion. Rather, I believe that they are doing a much better than average job of running their paid search efforts. Following are the factors that can help you mimic their success.

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