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Soaring profits found in search ads
Google, Yahoo benefit from higher prices for key phrases
By Jefferson Graham
USA TODAY

LOS ANGELES — It's no wonder Google's profit shot up sevenfold this quarter: Prices are soaring for search ads — those simple text ads that appear next to Internet search results.

Advertisers pay each time someone clicks on an ad. Search ads used to be available for a nickel or dime per click. Now they're costing more than $1, some even $40 or $50.

Google and rival Internet giant Yahoo dominate the $8 billion market for search ads, which are sold in an auction setting. So far this year, Google has reported revenue of more than $4 billion, almost all of it from the sale of advertising. “It's a supply and demand marketplace,” says Gregg Stewart, senior vice-president at search-marketing consultancy Fathom Online. “As more advertisers get involved, that drives prices up.”

Rates have risen 18% on average from a year ago, says Dave Lavinsky, who runs a site called TopPayingKeywords.com.

Soaring search ad rates helped Yahoo quarterly revenue shoot up 47% to $1.3 billion. Google's $381 million profit was fueled by a 96% revenue increase, to $1.6 billion, nearly all of it from search ads.

Advertisers love search ads because unlike mass-audience TV or print ads, they are targeted to people who are actively looking to buy. And advertisers only have to pay for an ad if a customer clicks on it.

Companies bid on words that relate to their business. For instance, a Florida lawyer would reach searchers looking for “Florida lawyer” and pay $15.49 each time the ad was clicked. That phrase cost just $2.02 in July, Lavinsky says. Other big jumps: “graphic design Chicago,” from $1.01 to $7.98; and “donate time share,” from 50 cents to $11 a click.

The most expensive phrase —“Chicago personal injury attorney” — sells for about $50, Lavinsky says. Lawyers are willing to pay to attract clients. A year ago, that keyword combination sold for $30, Lavinsky says.

Companies big and small spend countless hours and strategies trying to master the science of rising to the top of Google and Yahoo's regular search results.

Investing in paid search ads guarantees prominent placement.

In response to the rising ad rates, Jane Moritz recently decided to suspend paid advertising for her small business and work on making her site more Google friendly. “I was paying $1.50 a click, and then it went to $4,” says Moritz, who runs a baked-goods site, Challahconnection.com. “Not every click turns into a sale. You're lucky if you get 30%.”

Moritz has begun advertising again, but fears that competitors with deeper pockets will bid up prices during the holidays. “I can't afford to pay $6 a click every time someone looks at my site,” she says.

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