Seven Reasons Keyword Prices Are Rising

John Battelle’s blog identified Fathom’s recent announcement that search engine keyword prices increased 11% during the month in April. Despite a slight drop during the first two months of the year, it appears that the trend towards rising keyword prices is continuing. What is driving this sustained escalation of keyword costs? My thoughts are that the possible set of reasons includes:

1. Better conversion rates on advertisers’ website landing pages make each click more valuable for return on investment calculations.
2. Realization by marketers that there is additional ROI value in search traffic beyond immediate clickstream conversion is slowly being factored into prices.
3. More advertisers coming online fill in bottom-half purchases of specific keywords are thus raising the average price for that word (i.e. filling in coverage vertically).
4. Keywords previously underdiscovered – further down the long tail of terms – are being filled in, and previously undervalued specific keyword prices climb as a result (i.e. filling in coverage horizontally).
5. Margins are getting squeezed on the advertisers’ end as more advertisers are bidding on terms.
6. Seasonal opportunities (like mortgage-related terms) are baked into more recent figures.
7. Irrational spending is happening as novice search marketers unwisely jump on the search bandwagon. Yes, a keyword bubble.

My true hypothesis is that keyword prices are rising due to a combination of the above factors, with some being more influential than others. Perhaps there is a keyword price bubble as some have suggested, but most likely irrational spending is localized to specific sets of keywords, not symptomatic to the market overall.

What do you think? Are there additional reasons why keyword prices have been rising that I haven’t enumerated above?

David Beisel

David Beisel is a co-founder and Partner at NextView Ventures. He has been focused on early stage Internet startups his entire career, both as an entrepreneur and venture capitalist. As an investor in the digital media space, David was most recently a Vice President at Venrock and previously a Principal at Masthead Venture Partners. Prior to becoming a venture capitalist, David co-founded Sombasa Media, an e-mail marketing company best known for its flagship product BargainDog. Sombasa was successfully acquired by where David served as Vice President of Marketing. David holds an MBA from the Stanford Graduate School of Business and an AB in Economics, magna cum laude and Phi Beta Kappa, from Duke University. He also founded and leads the Boston Innovators Group, an organization which holds quarterly entrepreneur events drawing a thousand attendees.