September 13, 2006

Special Report: State of the Search Marketing Agency Industry 2006 -- 10 New Charts

SUMMARY: Whether you're a marketer considering hiring a search firm or in the industry yourself, here is MarketingSherpa's newest practical data on the search services industry. Includes 10 charts, revealing:

-> Dramatic shifts in staffing (in house and agency side)

-> Trouble ahead for both small PPC clients & SEO firms

-> Which types of firms are growing fastest

Biggest year-over-year change? The SEM services industry is *not* a cottage industry anymore ... welcome to the big time:

Today, MarketingSherpa released our 2007 editions of the annual Buyer's Guide to SEO Firms and Paid Search Ad Agencies. If you're looking for advice on how to pick the right firm as a client, then skip to the hotlinks at the end of this article. … If you're looking for our annual state of the industry report, keep reading.

2006, without a doubt, has seen the most tremendous shifts in the five years that we've been tracking the search marketing services industry. Here's a quick overview, plus some detailed charts and stats for you:

Quick Overview: SEM Services Industry Comes of Age

Search engine marketing (SEM) firms have been around for a decade now. Yet, even as late as 2005, MarketingSherpa research showed that the industry was still very much a cottage industry made up of hundreds of mom-and-pops and a handful of bigger players.

Even those bigger players were often dismayingly smaller than they appeared. We knew of several infamous examples whereby a staff of 10 or more sales reps sold as many accounts as they could while a pitifully tiny (sometimes only one or two experts) staff actually did the work on accounts once landed.

This year, expert staffing sizes have roughly doubled, client accounts have risen by roughly 50%, and there are now six firms reporting more than $10 million in SEM revenues, plus two more reporting more than $20 million in SEM revenues. (Note: these revenues do *not* include costs of actual media buys paid to search engines. These are solely services fees, which is where all the profit for agencies comes from.)

In 2006, the SEM services industry is at last coming of age, turning into a more stable, corporate group of firms. Most have been in business for years -- the majority more than four years.

However, along with growth, there are some significant warning signs about the industry's future. New client growth is not what it should be -- especially for SEO firms -- given the economy and marketers' appreciation of the importance of search traffic for their companies.

We look forward to seeing how this newly mature industry will react to these challenges in 2007. And, now, on with the detailed charts …

Chart: Top-Priced PPC Agencies Exchanging Small Clients for Larger Ones – Slowing overall growth
Top-Priced PPC Agencies

Throughout the year we've heard anecdotal stories of the top-priced PPC agencies jettisoning smaller clients in favor of larger accounts. In fact, in their profiles, many firms note that they now have a required minimum monthly spend for potential clients. On the low side, this is $3,000, but it can go to $10,000-$15,000 or more for top firms.

This makes sense when you consider many firms are compensated as a percent of media buy, sometimes plus a bonus for above-average results. It's not worth their time to bring on an account that won't be spending a significant annual amount on search marketing.

Worth noting -- you don't see data for economy-level priced PPC firms. That's because only one solitary PPC firm out of 62 profiled identified itself as serving that marketplace. Smaller accounts -- local marketers, small companies, offline companies still dabbling in search, super-niche B-to-B marketers -- make up the vast majority of Google, MSN and Yahoo! advertising accounts. However, few if any PPC search firms are willing to provide services to these marketers. The payback just isn't there.

Chart: Staffing Growth for Paid Search Ad (PPC) Firms 2005-2006
Staffing Growth for Paid Search Ad (PPC) Firms

Chart: SEO Client Growth Year-Over-Year 2005-2006
SEO Client Growth

Here's a scary chart for anyone in the search optimization industry – year-over-year growth in terms of total client accounts for 104 surveyed firms is slowing considerably. The number of clients who are willing to pay for top-of-the-line services is still increasing, but smaller clients are not increasing.

We suspect smaller clients may not be educated enough to realize SEO exists or that it's as important (if not more so) than PPC ads for their sites. The SEO industry is not investing in educational efforts the way the Googles of the world are.

Chart: Three-Year Staffing Trends for SEO Firms 2004-2006
Three-Year Staffing Trends for SEO Firms

As you can see, year-over-year staffing changes are dramatic for the top-of-the-line firms, reflecting the fact that both SEO and PPC are truly service industries. Clients paying top-dollar demand the kind of hand-holding and responsiveness that only fully staffed firms can provide -- especially in times of high account growth.

Many clients told us anecdotally that most SEM firms provide about the same level of expertise. The key differentiator is no longer secret tactics, extra-training or unusual analytics, but rather the amount of man hours and service-level provided.

Chart: Paid Search Ad (PPC) Firm Revenues 2006
Paid Search Ad (PPC) Firm Revenues

Chart: SEO Firms General Revenues 2006
SEO Firms General Revenues

Worth noting, only two of the firms in the "over $10 million" revenues category offered both SEO and PPC services in that volume. These heavy hitters are profiled in the Buyer's Guides, along with many smaller firms.

Yes, we would have liked to have gotten a bit more detailed in these numbers, but frankly, this "bigger than a breadbox" information was remarkably hard to get firms and agencies to admit to. Some claimed that their clients and prospects don't care at all how much money they make -- we suspect the opposite is true, especially for larger clients.

Chart: Percent of Brand-Side Clients Outsourcing Paid Search Ads (PPC) 2006
Percent of Brand-Side Clients Outsourcing Paid Search Ads

Chart: Percent of Brand-Side Clients Outsourcing SEO 2006
Percent of Brand-Side Clients Outsourcing SEO 2006

These charts, from MarketingSherpa's August 2006 survey of more than 3,000 search marketers, reveal the percent of marketers saying they use in-house resources for search marketing has not budged an inch from 2005. 74% say they do SEO in-house, and 73% say they're using in-house staff for PPC paid search.

How then have search firms grown their year-over-year client lists? Mainly we suspect from the ever-widening pool of marketers who are still entering the search world as newbies. In 2005, 15% of surveyed brand-side marketers said they were thinking of replacing or supplementing in-house teams with an agency in the coming year. Some may not have made the switch after all, and others have told us they took accounts in-house this year.

This lack of client-growth as a share of marketplace is somewhat worrisome for the SEM services field. Their main competitors are not each other, but rather the inclination for clients to take SEM in-house. If unabated, this could spell trouble in years ahead as the new clients launching SEM initiatives slows in the US.

Chart: SEM Firms Offering Both PPC and SEO Services - 2005-2006
SEM Firms Offering Both PPC and SEO Services

Another tremendous shift was the focus on specialization. Last year nearly every single firm we profiled offered both SEO and PPC services. This year, the majority have reversed this position, choosing to offer one or the other.

We're heartily in favor of this change because it's always been MarketingSherpa's contention that SEO and paid search advertising require, for the most part, extremely different skill sets. Unless a firm is willing to staff up to offer fulltime specialists for each, they should not offer both. You simply can't be a successful SEO or PPC firm and offer the other as an easy "add-on" no matter how much many of your clients demand it.

(And, yes, our anecdotal data strongly suggests that many clients would vastly prefer to work with a one-stop shop because managing one vendor is easier than two, and "it's all search after all.")

Chart: Brand-Side (Client-Side) Marketers on In-House SEM Hiring 2006
Brand-Side (Client-Side) Marketers on In-House SEM Hiring

In recognition of how tough it is for client-side marketers to hire search marketers, a full 76% of profiled SEO firms reported to MarketingSherpa that they offer training services for marketers' in-house staff. Very smart move we say.

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