Pay Per Click (PPC) as a means of advertising is maturing. When PPC pioneers such as Goto (later Overture/Yahoo! Search Marketing) first opened for business in late 1997, many internet analysts laughed, thinking the idea of bidding for positions on a search index was ridiculous and unworkable. Since then, the industry has taken off exponentially and is now worth an annual £760 million in the UK alone* . Online advertising now represents around 8% of all advertising.

So, Pay Per Click has grown from a tiny corner of the advertising world to a major player . The rising prices that the industry has seen in recent years are part of a natural process for any advertising medium as it moves from the cutting edge to the mainstream. This increase has given rise to the widespread myth that the future of PPC must necessarily mean constantly rising prices. Our experience has show that this is not the case and that prices do level off. The top prices tend to stay in proportion to industry margins.

In the financial services sector, prices rose faster than in other industries as more businesses got online faster. This is partly because commissions were a lot higher than in other sectors. However, even in this sector we are starting to see prices stabilise . Granted, some of these figures are a lot higher than they were when some of us started in this industry, but the price tags on many of these search terms have fallen considerably from their levels of two or three years ago.

Here though, prices have dropped in recent years on the broadest keywords. A good example of this phenomenon is “loans”; down from around £10.00 per click in 2002 to the £5.00 level per click today. In this case, instead of driving the costs up, competition has intensified the bidding within the lower prices and there are currently over 100 companies paying between 10p and £3 a click.

This compares to the keyword “secure loans” which is now at about £6.50. As tying your loan to your house allows larger loans and therefore better commissions, finance companies can therefore pay more per click and still turn a profit.

In travel the top bid for the keyword “holidays” on the Overture system costs £1.00, whereas a slightly more targeted keyword, such as the next stage keyword of “palma holidays” is just 42p

How did this happen? High costs mean an unsustainable ROI. By and large, the big boys in the game have got smarter, and are using their bigger budgets to develop wider campaigns rather than getting involved in bidding wars over ‘prestige’ keywords.

Take as an example Thomson Holidays, the number one tour operator in the UK . These guys have a weekly PPC budget of thousands of pounds but still only spend 40p for the keyword “mallorca holidays”. Instead of throwing money at such obvious keywords, they have spent time and money on researching the more targeted search terms, which, when added up, lead more people to their site.

With ever-increasing competition, it might seem tough for a small company to devise and run winning PPC campaigns that deliver the right results. However, there are still ways to achieve this.

More than ever, in the future the key to success will be to think “niche”. All your decisions must be made with your Return on Investment paramount. Companies will have to go all out to ensure that their keyword research will be tight enough and extensive enough to give them the long tail of keywords that can deliver more targeted customers and convert at appropriate rates.

Why the change? Just as Pay Per Click is a new technology, so the audience is also new. Over the last seven years there has been a marked change in search engine behaviour , as more and more users input strings of three, four or more keywords. Users’ confidence in search engines is growing and their search techniques are also growing more sophisticated. This sea change means that there are more and more niche markets. This further underlines the importance of doing the research that can generate lists of many thousands of keywords.

This change means there is still hope for smaller companies, who can still compete with bigger companies by carefully picking their niches. Smaller companies may have lower overheads and better conversions, which would allow them to pay more than the bigger companies for certain keywords that are more suited to their products than they might be for multi-nationals.

Competition across the whole of Pay Per Click is likely to grow between here and 2010; but the main effect of this will be to broaden campaigns, so that more and more search terms, even those of four or five words, will have hand-crafted creatives.

The bottom line is that PPC is no longer in its infancy, and most savvy advertisers have caught up with the brave new world of online marketing. The outrageous bargains of the late twentieth-century might have gone, but Pay Per Click is still the most cost-effective way of making a sale. The future will belong to those who invest time in their keyword research and their creatives, and are not afraid to take big decisions based on the ROI for a particular keyphrase.