February 6, 2009
Searchonomics - Dealing with a Depression
About a year ago, several search marketing commentators, myself included, suggested that the (worsening) economic conditions would pose less a problem for the search marketing sector than other sectors and might, in fact, provoke greater redirection of ad-spend towards search. At the time, the assumption was simple to make. Every business needs to advertise, especially when business is slightly down. Since search marketing provides inexpensive yet highly effective and traceable advertising options, clients should be beating paths to the doors of search and Internet marketing companies. In most respects, the assumption has held true. While we read of major layoffs in the traditional advertising sector almost every day now, relatively few layoffs have occurred in the search engine marketing sector. Many SEO, PPC and SEM shops are busier than ever. In one extremely important respect however, what feels like a safe assumption is in reality somewhat shaky. Many economists and most citizens want to believe this is a short-term downturn in the economy, a temporary disturbance after which all will be normal again. That assumption is probably not true. This recession is a fundamental redistribution of global wealth and political power. Do not assume this is a short-term recession when outlining your business planning. Unexpected things happen in unsettled economic periods. When those unexpected things happen, they happen quite quickly. During a recent phone call with a close friend in the Midwest, I heard her say something that has made my stomach toss and turn since. After repeating the mantra about advertisers needing to advertise during a downturn and the expected diversion of monies from traditional advertising channels to Internet advertising channels, I asked her if SEM agencies in her part of the country were as busy as those in this part. “Yeah, we’re busier than ever,” she said, “but we’re suddenly seeing a lot of clients who can’t afford to pay us on time, if at all.” “So what do you do about them?” I asked. “We lower our level of service but don’t cut them off”, she replied. “It’s easier to collect debts when relationships are still strong than when they have soured or ended.” She’s right, of course. Pressuring clients who are already under extreme pressures is not the wisest way to engage them, especially when the problem is not really their fault. We have entered a time when the costs of doing business are almost impossible to predict because they are starting to rise far faster than anyone could have anticipated even a few short months ago. Search meets stagflation. That got us talking about which sectors produced clients best suited to thriving during a recession. We agreed that search marketing is one of those sectors but we also agreed that search marketing agencies are going to have to become far more diligent when deciding which clients to work for and which to avoid. Our economy has officially been in recession for over a year now. It takes two successive quarters of negative economic growth for economists to declare recession. There is no official agreement on what constitutes a depression but few would argue that the ongoing global economic crisis is starting to look and feel like a long-term swampy morass. Just today, January’s job figures reported a loss of 598,000 jobs. Search marketing is consumer driven and is reflective of the general economy. American businesses and the consumers who support them know they are in a serious bind, one that threatens the steady supply of capital everywhere else on Earth. When we jointly agree the market is strong, we collectively pump money into it thus allowing that money to circulate. When money circulates, jobs are created and people have the confidence to spend more money. When we jointly agree that situations are wobbly, we collectively pull back. When hundreds of millions of consumers stop spending hundreds of billions of dollars, Main St. business bottom lines quickly go into contrition. American consumers are being hit with a triple whammy of problems at the same time. The first is the meltdown of housing markets, the primary place where people’s life savings are stashed away for retirement. In the hangover left by the housing bubble, many properties are now valued below what their owners owe on their mortgages, thus negating the personal wealth of hundreds of thousands of people. The second is a two-decade long decline in manufacturing jobs in the US, the union-pay factory jobs that employed most of America’s middle class a generation ago. Do you ever wonder how your factory worker father could own a home, lease two newer cars, pay for your braces and contribute to the excessive cost of your MBA? That’s because, in “real value dollars” (adjusted for currency worth and inflation), he was making about the same as you and your spouse are today. The third and most insidious problem is that of stagflation. Notice how in the summer the prices of virtually everything were rising faster and faster each month? Oil was near $150/barrel and the US dollar was declining rapidly in value. Now, we see retailers, landlords and homeowners radically slashing prices in a bid to lure consumer demand. Between the rapid increase in the costs of doing business and the need to radically decrease cost to consumer, businesses are put into a rocky hard place. Stagflation meets deflation. Price increases and the specter of job losses and personal insecurity have North American consumers clearly frightened. People don’t spend as much and thus suppliers, transporters and service jobs get cut. Stories of mounting job losses extract a terrible psychic toll on a society still reeling from last month’s job losses. Just this morning, one of the largest and most celebrated ad-firms, Crispen Porter + Bogusky laid off 7% of its workforce. Such situations have a way of building momentum. A shared sense of momentum is why my friend and I were talking about the economics of the search marketing industry late into the evening. Our conversation turned to sharing ideas on guiding our respective firms through these turbulent financial times. We are both old-time SEOs and the agencies we work with expect more than good results. They expect solid, well considered advice. We decided to debate our way through a number of ideas to see which we could agree upon. Our first point of agreement was the need to present educational products to in-house SEM teams. Often managed by an experienced SEM, in-house teams tend to be staffed by newer workers. Recognizing that no single search marketer has the skill-set or knowledge to assemble a truly holistic online marketing plan, (one that utilizes organic and paid search, display, social media, sponsorships, and other relevant channels), we agreed that there is a sustainable market for Search Marketing education within the SEM industry. Our next points of agreement involved where new client-growth might occur. We talked about specific sectors that appear to be winning or losing. For instance in the US, travel and tourism are losing while personal finance is winning. Non-necessary disposable items marketed to the middle class such as children’s’ toys, automotive accessories, local entertainment and new clothing are likely to be hurting. Essentials such as food, commercial transport, and items that allow homeowners to maintain their homes themselves should continue to produce strong opportunities. It is safe to expect consumers will stop buying stuff they don’t really need if they are having a difficult time affording the stuff they do need. This led to a part of the conversation that lasted a fairly long time. After debating different sectors against our perceptions of economic conditions, we summed up with a quick question and answer. How does one learn what products consumers need and which sectors will produce growth? Watch Warren Buffet. Buffet’s name led to our third point of agreement, the need to find the niches in a global market, to look far beyond North America for sustaining business. Though growth might be stalling in many western economies, the cascading series of problems causing our economic malaise are not as badly felt overseas, at least not yet. The overall economic outlook in Asia, South America, the Middle East and most of Europe, is stronger and business appears to be brisk. We agreed that interest from Warren Buffet and his gigantic independent investment fund is probably a better barometer of the economic health of a particular sector than the any pronouncements of any central bankers could ever be. Six years ago Buffet correctly noted that the ballooning US trade deficit coupled with unprecedented levels of personal and federal debt would force the value of the US dollar downwards. He started investing off-shore and looking for companies that posted strong international revenues. Around the same time he foresaw the rise in Chinese demand for oil and bought a stake in PetroChina which he quickly flipped for a profit. We definitely agreed that if we needed to know more about foreign markets and American consumers, Berkshire Hathaway’s investment portfolio is a good reference point to start from. The last point of agreement was a hopeful one. Search marketing is about to enter a third renaissance propelled by an immediate increase in the number of searchers access the web from mobile devices. We agreed that this re-evolution will fundamentally alter the practice of SEO and heavily increase PPC spending. Search is going local and SEMs are going to be presented with more, increasingly segmented markets. Though the search marketing sector is better suited than most others to thrive during these turbulent economic times, search marketers need to take extra care when choosing which clients to work with and which directions to look to for growth in the near to mid-future. We need to remember that ours is a sector that is driven by consumer demand. Even though we are B2B service providers, the businesses we provide services to receive their revenues from average consumers.