GET FOUND
The hottest vehicles driving sales leads online are search engines—and small businesses found them first. But the game is changing. Here's how creative companies are staying one step ahead.
FORTUNE SMALL BUSINESS
Saturday, November 1, 2003
By Alan Cohen

Ken Carlton, vice president of Corrugated Metals of Chicago, doesn't pretend to be a web-savvy guy. "I'm down here bending steel," he says. "I don't know anything about the Internet." For a long while that was sort of the motto at Corrugated, a 116-year-old, privately held maker of roll-form metal products for metal siding and railcars. By April 2001 the website of the $20-million-plus-a-year company had drawn exactly four sales in two years. You can crow over four cars, four homes, four Emmys—but unless you're selling aircraft carriers, four sales aren't going to cut it. Carlton turned to a web designer who—for $42,000—revamped the site and introduced him to a nifty marketing technique. Within a year Corrugated averaged 20 new online customers a month, whose orders have ranged from $500 to $3.5 million. Last year, in one of the worst downturns the metal-manufacturing industry has ever faced, Corrugated's sales rose 35%. Says Carlton: "I shudder to think what our company would look like" without the new web-marketing plan.

The online technique that has paid off for Corrugated is known as pay-for-performance search, or keyword bidding. Thousands of small businesses have found it to be the most successful online marketing technique ever for generating customer leads. Advertisers such as Corrugated jockey for prime positioning in the listings of search engines such as Google and Yahoo (which is a player through its pending $1.63 billion acquisition of Overture Systems). By bidding on keywords related to its business, a company can get its name—and web address—in front of users searching using that term. The advertiser pays only when someone becomes a sales lead by clicking on its link.

A $1.1 billion market in 2002, keyword bidding is expected to hit $1.6 billion this year and soar to $4.3 billion by 2008, according to Jupiter Research, which would make search engines the new yellow pages (see our companion story on the "new" old yellow pages, following this article). Explaining the success of keyword bidding, Gary Stein, a Jupiter senior analyst, says, "It's because consumers have embraced search engines. They want to find something, they use search engines immediately." In other words, this is a web marketing tool—unlike banner ads and pop-ups—that won't annoy potential customers.

Yet as paid listings become more crowded, they can become less effective—and more expensive. A top position for a hypercompetitive word like "mortgage" can run more than $10—for a mere click. Even the less-sought-after keywords are rising in price. The average for all keywords has gone from 30 cents in 2002, according to New York City investment bank Kaufman Brothers, to an expected 38 cents this year. When bids were low, advertisers didn't have to worry so much about converting leads into sales. Companies are now refining the way they bid, looking for the most likely prospects rather than just more lead volume.

And keyword bidding is evolving into part of an overall strategy using search engines as a lead generator. "Marketing on the Internet isn't about finding one method that works; it's an all-around process," says Mark Fiala, director of Internet operations for California Breath Clinics in Los Angeles, maker of the TheraBreath line of oral-care products. The $3 million business researched better, cheaper keywords, routed leads to specific product pages rather than the home page, and set up a way to solicit e-mail addresses to turn lookers into buyers. It reduced its monthly marketing tab from $8,000 to $4,000 while increasing its return on investment to some 275%. Here's how Fiala and others are freshening up customer lists and getting minty sales with search-engine marketing.

Better Bidding
If a company is lucky, competitors in its niche have not yet discovered keyword bidding. "This is not how CPAs find clients," admits Stephen M. Rousso, 59, of Stephen M. Rousso CPA & Associates, a two-accountant firm in Sherman Oaks, Calif., who estimates that he gets $2,000 in new business each month from the $40 to $75 he spends on keyword bidding. Because few CPAs have discovered the technique, he can rank at or near the top for keywords such as "business accountant" and "small-business accountant" for 25 to 35 cents a pop.

Rousso, a CPA for 17 years, previously had little success attracting customers through telemarketing. "It required a lot of effort to woo and win clients," he says. His web efforts were doubly disappointing until he revamped his site last December and started keyword bidding. Soon after, Rousso was getting two to five contacts a week from as far away as Japan and Europe. About 25% of the leads Rousso gets via search are what he calls "looky loo," the crazies who want to pick his brain for free. But because Rousso is paying chump change to woo customers, he can endure some chumps—three of ten leads become clients.

Most businesses, however, can't afford that looky loo, and they're discovering that keyword bidding isn't figure skating: You don't always need to be No. 1 in the rankings to take home the gold. "We've found that as a general rule it's better to be No. 2 or 3," says David Kim, director of online marketing for Hotwire.com, a travel website with $110 million in annual sales and 20,000 keywords (at presstime it had agreed to be acquired by Barry Diller's InterActive Corp. for $665 million). "First place can be a nonefficient buy. You'll often get a lower conversion rate." That's because users will impulsively click on the first link in the listings without really asking whether it's what they want. So being No. 1 means shelling out more for poorer-quality leads than the No. 2 or No. 3 bidder.

Determining which keywords are working has traditionally involved a bit of guesswork. "Clicks can be misleading," says Renee Silverman, director of marketing for Irv's Luggage Warehouse, which with its sister businesses, Emporium Luggage and Executive Essentials, makes up an 11-store chain headquartered in Arlington Heights, Ill. In-store sales have been "soft for a long while," she says, "but we're seeing steady growth online." Maintaining that growth means knowing what's driving sales. Gradually search sites are providing helpful tools. In August, Silverman downloaded a free utility from Overture that tracks which clicks, from which keywords, get the customers. "You really need it, or you're spending blindly," she says. After only a month she saw that the most likely sales come from users who either type a specific phrase into a search engine, such as a product name or niche, or type a broad term and then wade through listings. Traffic from terms like "luggage" do not convert well, while phrases like "Hartmann luggage" do. So Silverman lowered her bids on the broad terms and focused on more specific, less expensive keywords where it's cheaper to be No. 1 and the traffic is more targeted. "We have less Overture traffic now, but more qualified leads," she says.

Develop a Diversified Strategy
Keyword bidding is just one way to reach customers through search engines—and not always the best one. Timothy Heitmann, owner of Popcorn Palace in Chicago, which sells $1 million worth of gourmet kernels annually in flavors ranging from jalapeno to chocolate-fudge brownie, has experimented with another search-engine marketing technique known as optimization. This involves tailoring the layout, code, and language on a website to make it appear higher in the "editorial" search rankings determined by relevancy rather than bid price. (For example, making sure the home page repeatedly uses desired keywords in the title, headlines, links, and so forth.)

Heitmann founded Popcorn Palace with his brother Chris in 1995 as a single store in Chicago's Navy Pier and expanded to mail order and then the web in 1999. The Heitmanns spent a couple thousand dollars—and a $200 monthly maintenance fee—to optimize their site but were disappointed to find that their listings didn't always turn up so high. "We'd be No. 3 or No. 4 on AOL for a while, then we'd drop down to 20," says Timothy. While checking his ranking one day in 2000, he noticed paid listings at the top of the page. The Heitmanns investigated and started bidding on Overture, ultimately using about 100 keywords. Through keyword bidding, Popcorn Palace quickly landed several key corporate customers, including Fannie May Candies (a $60,000 account in 2002) and FTD.com ($50,000). The Heitmanns pulled the plug on optimization and put 90% of their marketing budget into keyword bidding.

As the bids have gotten more expensive, from an average of 18 cents in 2000 to 44 cents last year, the Heitmanns' spending has exploded, from $20,000 to $50,000, and it has been a struggle to keep ROI steady at three to one. They have reached an upper limit on what they can spend on keyword bidding and on how far they can grow it. "We're going to go back to optimizing the site, in conjunction with the searches," says Timothy, who is now seeking a consultant to manage it all. (Unless it's what you want to do all day, you'll need a consultant to do tailoring and monitoring. Examples include MoreVisibility.com, based in Boca Raton, Fla., and Toronto's Page Zero Media.) By diversifying its strategy, Popcorn Palace is hoping to duplicate the experience of iCode, a developer of enterprise software for small businesses that is based in Washington, D.C. It generates $3.41 in sales for every $1 it spends on keyword bidding, but its return from its search-engine-optimized site, whose code is embedded with keywords for each of its software offerings, is almost 24 to one. Even so, "there's just so much you can do to boost your ranking," says Steven Toole, the company's vice president of marketing. "You've got to have both paid and nonpaid listings to get your message across."

Lamps Plus, a 44-store, 29-year-old company based in Chatsworth, Calif., has tried keyword bidding and optimization—along with every other search-engine marketing technique. Angela Hsu, director of Internet business development, has gotten great results adding what's known as paid inclusion to her marketing mix. In this scheme a company submits its web pages to a search engine to guarantee that they get indexed, which is important because the typical search engine normally includes just 30% of the web's pages. By paying search engines like LookSmart a flat fee of 20 to 40 cents a lead, Lamps Plus yields a lower total customer-acquisition cost than its keyword bidding on Overture ($30 vs. $37). Better still, paid inclusion requires less legwork. "You don't have to manage it on a day-to-day basis, as you do with bidding," says Hsu.

What's Next
So far, small businesses have done a remarkable job of adapting to the shifting landscape of keyword bidding. But as more sites chase this proven revenue model—hello, Microsoft!—more companies will bid, and prices will rise. It's like going to an auction with your neighbor, who happens to be Ben Affleck. "Gradually the smaller guys will be crowded out," says Richard Fetyko, a Kaufman Brothers analyst. "They will turn to paid inclusion and second-tier providers, like FindWhat.com, where they can bid for less but will get less traffic."

Small businesses have a more optimistic outlook. "When bids go up, conversion rates go down, so smart bidders will bid down," says David Kim of Hotwire. "It's a self-regulating market." Emerging technologies will create new opportunities, such as letting local businesses pitch only to area customers and helping advertisers run their ads in the proper context (a search for Paris Hilton paparazzi photos doesn't signify hotel interest). But small businesses have to be self-regulating too. As long as they embrace savvy bidding, better tracking, and accountability for every dollar, they'll stay in the picture—and the rankings.

This article was published in Fortune Small Business - November, 2003