A interesting article over Market Watch discusses how the increase in click cost on Google Adwords is forcing some advertisers to cut budget or look elsewhere.

Market Watch chats with 6 advertisers who all spent between $4 million and $10million in 2006, who are dramatically reducing their spend budget for 2007 –

In many cases, the cost of an eBags.com ad placed on either Google’s own Web site or one of its affiliates now equals 45% of the price of the product it promotes. That’s crimping the company’s own profit margins and forcing it to look elsewhere to market its bags. “We’re testing print ads right now,” said Cobb, whose company will spend up to $8 million on ads in 2007.

Keyword search prices on many terms rose between 40% and 60% last year, according to advertisers like Dan Sackrowitz, chief executive of Bare Necessities, which sells lingerie online. He saw his Google ad budget soar 50% last year.

So is there a rise in ppc keyword costs? I don’t think there would be much argument from anyone who didn’t think keyword prices have risen further. These increases have effected some industries much more than others, some areas are pretty tough to stay viable. Is it any real suprise though, as more and more new advertisers trial Adowrds; Not only in terms of sheer numbers but also lack of experience. Those already in the market already know their average cost per click & conversion rates and hence their limit per say, before it starts eating away at their profit margin. New advertisers will immediatey want to be competive to test the platform and tend to increase the industry average further.

How will this effect the pay per click industry? It depends. Some industries are going to be further dominated by big brands with higher margins who can pay that much more. Therefore advertisers, especially small & medium broad product or service based businesses are going to have to get smarter to be competitive. The level of growth will fall sure enough in time and ‘even out’, but an even greater focus on niches and conversion will be key moving forward.

Isn’t this the same for all industries as they mature though!?

Will someone tell this guy;

Yet Shmuel Gniwisch, founder of online jeweler Ice.com, got a conversion rate of less than half a percent for the $750,000 worth of ads he placed through Google during November and December, a key selling season for retailers. For every 300 people who clicked on an Ice.com ad, only one actually purchased something, Gniwisch said. “You couldn’t get a worse performance,” he said. As a result, he’s planning to cut his Google ad spending by 40% or more.

He needs to get himself a decent agency.