Radium

Is paid search eating your organic sales?

Thursday, 14th May , 2009

If you’re running a paid search campaign that includes keywords you rank well for organically, you need to be careful that your paid search campaign isn’t generating sales at the expense of organic search. Cannibalization occurs when a user that would have clicked on your organic listing clicks on your sponsored ad listing. Because you pay on per click basis, a free click is now costing you money.

This subject is widely discussed in the SEO/SEM realm and there are arguments on both sides as to whether or not organic search is beneficial or detrimental to organic search when you have high rankings. We believe a well designed paid search campaign will supplement organic search and can provide an overall lift in net profit. This is of course if it’s done correctly. But the real answer is, no two campaigns are the same and you need to test each campaign to determine the degree of cannibalization you are experiencing.

On the surface, paying for free clicks seems like a dumb thing to do, something that was once free now costs me money. However, the degree to which paid search is stealing sales from organic search isn’t the only metric you need to measure. Below are 6 factors you should consider before pausing your paid search campaign.

- Conversion rate differences
- Average sales price differences
- Cost per click (media spend)
- Conversion attribution
- Lifetime value of a customer
- Competition

1. Conversion rate differences
It’s not uncommon for your organic search traffic to have a different conversion rate than your paid search traffic. In this post conversion rate is defined as the number of visitors that complete an action (sale or contact) compared to the number of visitors that could complete the action (visitors to the site). The reasoning behind the difference is commonly attributed to differences in landing pages visitors reach. With paid search you decide what page to direct a visitor to. Normally this is an optimized page with limited or focused choices for the user. With organic search, the engine decides for you and sometimes it may not be the best suited page for a conversion (see the variations of Nike’s landing page below). The key is to measure the conversion rate of both organic and paid search. If your paid search campaigns have a higher conversion rate you will be able to tolerate a higher percentage of cannibalization.

Nike sponsored landing page

Nike organic landing page

2. Average sales price differences
Similar to conversion rates, you may discover that the average sale price for organic and paid search traffic differs. Again, because you choose what page to direct a visitor to, you also select what products/services to highlight. If paid search has a higher average sales price, you can tolerate a higher cannibalization percentage.

3. Cost per click (media spend)
Often the most likely candidates for cannibalization are product or company name keywords because most websites rank well for these search terms. These keywords are often the All Stars of paid search because they achieve a stellar click through rate (CTR) and generate a lot of sales, although, they may be doing it at the expense of organic search. However, often these keywords are fairly cheap on an individual per click basis. So even if you are paying for some organic traffic, the cost is less than the additional revenue it brings in.

4. Conversion attribution
We often credit the sale to the last source the customer touched; however, an experienced marketer will tell you the customer conversion cycle is not a simple 1 to 1 relationship. Often it takes multiple sources to convert a prospective customer into a sale. If you dig a little bit deeper, you may find that some of your sales come from customers that have clicked on both your organic listing and your sponsored ad. You need to be careful that you don’t attribute the entire sale to one medium when it should be partially attributed to both. If you would like a more detailed analysis of the conversion attribution problem check out SEOptimize for a good write-up on the subject. Thanks to @heygregwood for sending me this article.

5. Lifetime value of a customer
When analyzing your search marketing efforts, consider the lifetime value of the customer not just the initial sale. At Radium, we have numerous clients that generate the bulk of their sales from direct traffic from existing customers. Even if they pay a little more initially to capture the sale, over time the ROI for this lead will increase because the customer purchases additional goods with no (or very little) additional marketing dollars.

6. Competition
Even if you’re the first organic listing for a particular search phrase you might not be the first listing a user sees. There could be sponsored listings, Google shopping results, alternative search suggestions or local search results shown above your organic listing. All of these items are competing for the users’ interest and some percentage of searches will click on these links instead of your ad. If the sponsored link points to a competitors’ website, you may be giving away potential sales. For some organizations, preventing a competitor from capturing a sale is worth the incremental cost.

You may also want to consider the resellers of your product. Many of them probably run sponsored ads. Having a sponsored ad listed among the resellers of your product may cost you more than your organic listing but if the margins are greater for direct sales than the margin you get from resellers, it may be worth the additional cost per click. The example below shows a search for the word “Converse”. Notice that the official website is both the top organic and sponsored listing. Target and Zappos (both resellers) are also listed but the margin from a sale on these sites is probably much lower than for a direct sale.

How to determine cannibalization levels
The most accurate way to determine cannibalization levels is to compare organic search sales with your paid search campaigns turned on and turned off. If you compare two like periods (i.e. no seasonality, promotion or advertisement differences exist) a loss in organic sales can be attributed to paid search cannibalization. Don’t be alarmed if some degree of cannibalization is occurring. If your keywords rank organically in the top 5 positions most likely you’ll experience some level of cannibalization. But keep in mind, the key factor is not the cannibalization percentage itself but your overall net sales. If net sales are higher in the period with paid search turned on, then even with cannibalization you are better off employing both paid and organic search.

Please note when you compare differences in paid and organic search, you should do it at the individual keyword level, not the overall campaign. This will account for keywords differences.

Calculate your break even cannibalization percentage
For whatever reason testing may not be an option for you. If this is the case I suggest you perform a rough calculation to determine the level of cannibalization you can stand before net profit decreases. While this isn’t as good as the actual test, it will give you the degree to which cannibalization will effect your campaigns.

To simplify the process we’ve built an Excel spreadsheet that will compute organic search cannibalization break even percentage by keyword based on your campaign results. To perform the calculation simply download the spreadsheet and follow the instructions. You are free to use, modify and distribute the spreadsheet as you see fit, I just ask that you retweet or share this post if you find it useful.

Download the spreadsheet -> Organic search cannibalization calculation