If your business model is in part dependent upon obtaining traffic from Google's Adwords pay per click program, the escalation in cost of clicks has been painful. As an example, in the real estate field, the cost of a paid click has increased from about $0.35 in 2003 to over a $1.00 today. The escalation in bid prices has been relentless. However, in today's low inflation environment bid escalation can not continue indefinitely. The cost of buying traffic has become so expensive that in many cases it can only be justified via dubious lifetime customer value calculations. Well, buried within Google's blow out earnings report (net income of $2.73 billion in Q3), is a note that the average cost per click declined by 5%.
The 5% decline in average cost per click was only on a sequential quarter to quarter comparison. On an annual basis the cost per click still registered another 5% increase. Thus, given that the decline is only based on one quarter and the longer term trend continues upward, it is too soon to come to a conclusion that Google cost per click has finally peaked. However, the peak has to come someday. The churn of PPC advertisers with those dropping out or reducing their bids may finally be at a level where Google can not recruit new advertisers fast enough to replace the ones that are reducing spending.
Another cause of the declines in cost per click could be due to advertisers holding budgets constant while obtaining an increase in clicks. Google announced a phenomenal increase in clicks, and thus total their revenue was up. It may even be the case that some advertisers had increases in total spending despite spending less per click due to the increase in total clicks and getting more traffic for less per click. The Google quarterly earning report indicates "Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 28% over the third quarter of 2010 and increased approximately 13% over the second quarter of 2011".
Has the cost of acquiring traffic via Adwords finally become so expensive that bid inflation has peaked? Looking at the next quarter's result should make the picture much clearer.