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Monday, February 20, 2006

The Challenge of Keeping Pay-Per-Click Campaigns Profitable

Posted by @ 11:23 pm

If you have been in the market to buy pink diamonds or engagement diamond rings, you’ve probably come across online diamond jeweler Blue Nile. The company is a highly successful online jewelry retailer with annual sales of $200 million, and competes against the likes of Tiffany and Zale. In addition, Blue Nile has been a poster child and often-quoted case study for various aspects of online marketing, since the company has applied some highly innovative email and other online marketing ideas and built a successful business in a very demanding market.

This month, some of the sparkle has come off this success story: The company’s share price fell sharply after disappointing fourth quarter results, and a disappointing outlook for flat earnings growth in 2006 has left investors scratching their heads.

What is really interesting are the reasons given by Blue Nile’s management for this disappointing performance: The company has stated that a cost explosion in paid search (pay-per-click) advertising has reduced their ability to drive as much profitable sales growth as originally expected. Blue Nile said that the cost of their Google AdWords campaign has risen by 50% compared to the previous year. To ensure its paid search remains profitable, Blue Nile has refused to pay click prices that it deems to be too high, i.e. that no longer provide the required return on investment. Cutting back on the paid search expenditure has hit the company so much because they strongly relied on paid search as an advertising channel – pay-per-click advertising used to be their most cost-effective form of advertising.

Blue Nile’s experience reflects that of many other online advertisers complaining about rising pay-per-click costs. On the other hand, paid search advertising remains a very effective advertising channel for many companies. This is reflected in the forecasts for continuing paid search growth. Some of this growth may be driven by inflated click costs, but much of it will come from new advertisers (and brand advertisers) entering the paid search arena profitably.

How can small and medium businesses make paid search work for them once the big fish with deeper pockets are crowding the market? For one thing, keeping a good grip on your ROI is essential – you need to know how much you can afford to spend per click to acquire a profitable customer. Secondly, you need to get even smarter about your pay-per-click campaign. For example, you can exploit possible pricing imperfections or pursue a niche keyword strategy, limit your campaign geographically or limit it only to your most profitable product lines. All of this can be quite complex and time-consuming, but it is definitely worth the effort if you get it right. If you need some expert help, check out ineedhits’ Easy PPC service – an affordable, easy way to get a professionally managed pay-per-click campaign without having to worry about it yourself!

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