Are the days of cheap online advertising dwindling?

A recent New York Times report by Darren Dahl called "Small Players Seek an Alternative to the Expense of Pay-Per-Click" indicated that pay-per-click costs are on the rise, leaving small businesses wondering how to deal with the increases.

Time to panic? Not yet. First, get a better sense of what it actually going on, and then adapt your marketing strategy to it.

The Times story is built around the single case of vacation rental entrepreneur Tom Telford who saw his pay-per-click costs more than double between 2001 and today, although sales from the ads did not rise to match. The paper then provided quotes from experts that sounded as though they could have had multiple meanings.

Dahl points to competition as the reason for the rise in cost-per-click (CPC) rates, citing significant growth in the number of paid clicks that Google has seen, year over year. That might be true, though there are other possible explanations.

More people use search on the Internet, which means more exposure to ads. Ads themselves may be getting better at bringing in people. And there are many more ads, often from large companies that better know how to write an ad and craft an offer that will bring in consumers.

Consider other factors, as well. Prices in general have risen over the last decade because of inflation. If you look at annual inflation rates over that time, you could have expected prices to rise by more than 40% for no other reason.

Another reason to question the report is to remember that Google's average cost-per-click revenue is falling. In its most recent earnings announcement, the average figure was down 3% from the previous quarter and 15% year-over-year. Clearly not everyone's cost per click has gone up.

It could be that competition has driven up the price of keywords that are in greater demand. Here's a table from Internet marketing consultancy Hochman Consultants based on a mix of 50 of their customers. The group may not be representative of the country as a whole, Hochman points out, but the data is interesting:

cpc chart

There are a number of things happening. One is that CPC has come close to tripling between 2005 and 2011, even as click-through rates have dropped. The increase in CPC could be because more companies compete for the best-pulling set of keyword matches to offset falling click-through. And the mushrooming of the invalid click rate would drive up the overall costs of campaigns, even if there was no increase in CPC.

In other words, depending on the audience you're trying to reach, you could either be seeing skyrocketing costs or your CPC might be dropping. And yet, even if CPC drops, you might find the cost of campaigns increasing because of invalid clicks.

What to do? Get smart about how you conduct online marketing. As a recent survey shows, many small businesses market on social media without paying, primarily using Facebook, Google+, and Twitter. See what return an investment of time in building a presence can provide. Use SEO more carefully, as well, to attract unpaid traffic to your website.

If you are going to place paid online advertising, then consider where the best value might be. The Wall Street Journal quotes the chief marketing officer of digital marketing software firm Kenshoo noting that its clients get a 30% better return on Yahoo/Bing network ads than Google.

When it comes to online marketing, these days you have to take a close look at the numbers people throw around, do some testing, and be a skeptic. But if you do, you can find the balance of spending and activity that best benefits your business.