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Q1 PPC Benchmark Data: Ouch!

Taking a look at the first month and a half of Q1, it looks like the pain in the retail sector is spreading and deepening. We ran an analysis to show the year over year performance trends over the last 7 months or so. We took data from our 40 largest retail clients, and tracked the median of the year over year performance differentials in several different areas. For comparative purposes, we simply divided this years' numbers by last year's. 100% represents the previous year’s performance level that week. As the graph shows, the numbers are discouraging. While a number of our clients asked us to sacrifice efficiency for top line sales in the early part of the downturn, most have chosen to pull back at this point and protect the bottom line. We hit a wall around Week 37 of 2008 at about a 20% Year over Year drop-off in sales and costs, and those numbers have gotten slightly worse since Christmas. Let's peel the onion to figure out exactly how the economic downturn has impacted paid search. Pretty clearly there are three possible mechanisms that contribute to a decline:
  1. Decline in Sales per Click: if a smaller fraction of visitors through PPC ads make a purchase or the revenue per sale drops, or both then a retailer will generate fewer sales.
  2. Competitive Pressures: if declining sales per click force an advertiser to lower its bids more than its competitors, the advertiser will drop down the page and get fewer clicks per search.
  3. Fewer searches: tightening wallets may affect user behavior in another way. In addition to potentially lower Conversion Rates and AOV, one may well see fewer searches in general.
Take a look at the following graph showing YOY Conversion Rates and Average Order Values on competitive search. For consistency we're just comparing Adwords to Adwords. YoY CR and AOV There's some fascinating stuff here. First, note that late in the Holiday season, AOVs were pretty close to '07 numbers for most of our clients, but the conversion rate suffered. Since the start of the new year the problem has reversed: conversion rates are about where they were in early 2008, but the AOVs are off 10% or so. Revenue per visitor is part of the problem, but by itself it's not the whole picture. Could it be the competitive landscape? Are our clients having to pull back more than their competitors hence getting a smaller share of what's available? YoY Position Changes This suggests that our clients were about half a position lower than the previous year for much of the holiday season, but are actually higher on the page than they were last year at the same time. Averages lie, and medians of averages are a pretty squishy measure, but this suggests to me that our clients (and our analysts) have reacted appropriately to the landscape and efficiency needs, and that they're not totally out in left field compared to their competitor's reactions. Competitive pressures may have impacted Q4 slightly, but don't explain the YoY drop in Q1 at all for our client set. This leads us to the last explanation: traffic volume. Are there just fewer people out there searching for our clients' goods and services? Unfortunately this is among the hardest factors to gauge. Because of match-type and network partnership shenanigans, impressions aren't an accurate measure of anything. Click volumes are impacted by position on the page, so that's not the right measure either. Instead, we picked "brand" traffic as a proxy. Figuring that our ads are in position 1 on our client's trademarks always, the traffic and sales volumes coming off of brand search may indicate general levels of demand as well as anything. This is far from perfect. Probably very far. Brand search is largely a function of other offline marketing efforts as well as loyal customers, so as our clients pull back on those efforts Brand sales may fluctuate. Also, customers may be more inclined to latch onto those organic links to affiliates promising discounts on retailer's brand names. With those caveats understood: YoY Brand Sales This suggests to us that the main cause of decline is simply fewer people shopping. The people who are shopping are spending less, but the biggest dent has come from traffic. We remain optimistic that these numbers will turn this summer and we'll start seeing growth again in Q3, but it could be a rough ride between now and then. We wish everyone the best of luck in these trying times.
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