Is Paid Search Still Viable for Smaller Companies?

Business Week wrote an article about how smaller businesses are being priced out of the cost per click market. Since big and medium sized businesses are pouring money at Google Adwords and other CPC programs it’s driving up the cost of CPC.
CPC started out as a way for smaller businesses to advertise online for “cheap” but now that so many are in the mix, the cost for marquee keywords is going up, and up, and up.
Business Week writes Think of it as fallout from a new online land rush. Brand giants from Best Buy Co (BBY ). to Zale Corp (ZLC ). are diverting more and more of their marketing budgets to search ads. They’re driving up prices and stealing customers from some of the smaller businesses that have bought the bulk of those ads. Web users have learned to shop around more, and now, instead of clicking on ads from the little guys and buying from them on the spot, they’re often buying from the big brands they know well. If many of the small and midsize companies that pioneered this ad medium get disillusioned, search ads could lose their luster.
What’s the solution, what can smaller businesses do?
Andy Beal of Marketing Pilgrim writes that the solution is for smaller businesses to not bid on common keywords but to think beyond common keywords. Instead of “cheese”, bid on “New York cheese” or “taco cheese”. Get more specific.
Andy analyzes the situation and writes:
* Stage 1 – Medium and Large companies spend huge amounts of money on banner ads. Small companies can’t compete, so they start experimenting with paid search and get great ROI with little effort.
* Stage 2 – Medium companies start experimenting with paid search. Their campaigns are not very targeted but they’re able to get great ROI with little effort, so they start pumping in more money. Meanwhile, the small guys find that they can no longer compete for generic keywords, so start targeting the “long tail” and find there are great returns to be had from more targeted keywords.
* Stage 3 – Large companies enter the paid search channel. They don’t spend a lot, as they are not convinced of the benefits. “Where’s the branding?” they ask. Medium companies start fine tuning their ads, work with landing pages, but still compete for the more generic keywords. Small companies have the long tail to themselves, they’re multi-variable testing, switching campaign creatives and getting great ROI from hard work.
* Stage 4 – currently – Large companies are dumping huge amounts of money into paid search, but still with little measurement or fine tuning. Medium companies no longer have the budgets to compete with the ever-increasing bids, driven up by the larger companies’ ad budgets. They start complaining that they’re no longer getting the ROI and threaten to pull back paid search budgets. Some even go crazy and suggest they’ll spend it on television!
* Stage 5 – the evolution in 2007 – Medium companies will discover that they need to be more aggressive with their campaign management and explore the “hidden” keywords known only to those marketing the long tail. There, they find lower CPCs and better targeted visitors. Small companies get crowded out and start exploring social media marketing, SEO, viral campaigns and locally-targeted search ads. Large companies realize they can’t afford to compete against each other’s monstrous budgets, and start backing off on their paid search spending, before finally discovering the long tail. Growth in the paid search space starts to slow as small, medium and large companies start becoming more savvy with their ad spend and other mediums start offering lower CPAs.