The Online CMO by Philip Hallenborg

Since Google removed the Best Practice Funding program in 2007/2008 (its latest media agency kick back scheme involving 3-8% of ad spend money back) most search engine marketers are looking at gross margin from Search Engine Marketing of 8%-15% of spend (excluding consulting or fixed revenues). In a highly competitive market a search engine marketing firm has to be exceptionally capable to exceed gross margins of 15% on core transactions.

Naturally, this suggests that Search Engine Marketing is a volume game. Much like a media agency model it is all about achieving critical mass or break even volume to achieve high return on invested capital.

Although fast growth and redirection of offline budgets into online is driving search spend in general, there is one specific characteristic of search engine marketing (and especially search engine optimization) that creates issues, namely scalability. Or should I say lack of scalability.

Our colleagues at Google figured out a long time ago that a middle man is necessary if Google is to preserve a highly scalable and profitable business model. The middle man – in this case the search engine marketing firm – would deal with the time consumable, non programmable issues such as client meetings, multi language translation, client education and creative management of an effective key word strategy.

The lack of scalability equals cost. For every dollar spent in search engine marketing there is a marginal increase of the work needed. Of course large accounts tend to scale with size, but again many key word strategies for blue chips can involve hundreds of thousands of key words.

If I take a quick look in my market – Sweden – there are approx 6-10 dominant competitors. Most of them are running businesses that are not profitable. A qualified guess would be that a stand-alone Search Engine Marketing play needs at least 10-15 million euro of search spend before seeing black numbers on the bottom line. Few companies can and will achieve that kind of revenue given the competition so consolidation, especially with other online marketing product areas, is to be expected over the coming years.