Economic Trends in PPC Competition and Costs per Click

Emily Lutz
March 3, 2023

How is the economy currently affecting competition and CPCs?

When the economy is uncertain or the stock market is trending down in a bear market, many companies feel like they should decrease their ad spend. However, economic downturns can be a fantastic time to gain market share and reach people who are still purchasing.

Fear can drive companies to decrease their ad spend if they don’t feel like they are getting the best returns from their campaigns for their business. They might stop paying for an advertising agency or outside freelancers and take running campaigns in-house, even though it isn’t their expertise and reduces the long-term return on investment. 

Companies may also cut spend on campaigns focusing on brand awareness and the consideration phase of the marketing funnel that are less likely to drive immediate purchases or leads. SEO, content creation, website development and design, social media, display, and non-brand search campaigns are typically among the first to go.

However, these decisions can have long-ranging effects and can hurt business growth in the long run.

What happens to costs per click when businesses cut spend?

A slow economic market can actually make it easier to advertise online and gain market share.

When the economy is growing, new competitors are coming into the market, other similar businesses are also increasing their ad spend, and the cost per click (CPC) on online ad platforms increasesrising more than 200% per year at times!

On the other hand, when the economy slows, other businesses may decrease their ad spend or decide not to advertise at all.

In January and the first half of February 2023, across all of Perfect Search Media’s clients, the CPC on Google Search campaigns decreased by an average of 35% year over year. E-commerce companies went through some of the largest decreases with CPC down by 50% year over year.

But all of our client’s industry costs per click were down year over year. This means the exact same advertising budget may reach twice the number of people as it did a year ago.

How does a slow economy affect conversion rate?

A lower cost per click is good but what about the actual conversions? Are people still purchasing or submitting quality leads?

The answer is yes for this economy in early 2023. It may not stay this way if unemployment is high or salaries are low. But consumer demand and purchase behavior are still strong, which is one of the reasons we are not in an official recession.

Unemployment is low and consumers have money to spend and are still spending. In January and the first half of February 2023, across all of Perfect Search Media’s clients, the conversion rate increased by an average of 35%.

How does the type of industry influence conversion rates?

The conversion rate trends changed by industry more than the decrease in CPC.

E-commerce, professional associations, non-profit organizations, and local services had the largest increases in conversion rates.

Higher education averaged an increase in conversion rate of around 20% year over year, so less than the other industries.

Business-to-business software and services varied the most. Conversions for some clients increased, some were even, and some largely decreased year over year.

As we mentioned, a slow economy causes businesses to tighten any new spending, which can decrease conversion rates for B2B businesses. But individual consumer spending is still strong.

How does the economy affect trends in competition?

Businesses that keep their ad budgets at the normal amounts will usually see an increase in impression share in their Search ads as other companies decrease or end ad spending completely.

Perfect Search Media’s clients are seeing more competitors drop out of the Auction Insights reports on Google and Microsoft Ads compared to a year ago.

Clients are also increasing in impression share if they have not decreased their ad spend. That is, of course, if they’re often leap-frogging competitors in the impression share for important converting keywords. You may see your Position Above Rate, Outranking Share, and Top/Absolute Top of Page Impression Share also increasing compared to competitors.

As we learned during the economic downturn in the first half of 2020, a slowdown can be a fruitful opportunity to increase your market share compared to a competitor that leaves the market. Consumers are still shopping and businesses are still going through the sales process and performing demos during declines.

Why is it important to keep ads going during a downturn?

Even if businesses are not ready to pull the trigger on a purchase right away, your product or service will be primed to be their first consideration when the economy starts to increase—assuming you continue to advertise and interact with leads. Leaving the market or largely decreasing spend allows competitors to get a leg up with potential customers.

When the economy starts recovering, you may need to hire and onboard a new advertising agency or specialists. Beginning a new partnership can take a couple of months before you actually start to compete. You can lose a lot of customers who want to move fast in the interim.

How do platform and campaign types influence trends?

Usually, the first ad spend that gets cut in a slow economy is brand awareness and high-funnel consideration campaigns, which are normally a part of the prospecting display and social media targeting.

With these types of ads, we are reaching large audiences of people who may be interested in our products and services but are not actively searching for them right now. Therefore, direct conversion rates are quite low.

These ads often increase conversion rates and get potential consumers into your funnel in the first place to remarket to later but rarely lead to immediate purchases. They are usually the first to be cut while remarketing and brand searches or direct non-brand product searches are the last to go.

However, this is often not a successful long-term strategy for a business. People who have already visited your website or that are searching for your brand will likely find you regardless of how much ad spend you direct at them.

Why should you invest in cheaper ads during a downturn?

To grow your business, you need to reach new customers, the ones with a more expensive cost per acquisition and lower ROAS for their first purchase. And display and social media ads can be a cheaper way of reaching your target audience than search ads, depending on keyword competition levels.

For Perfect Search Media’s clients in January and early February 2023, search ad costs per click are down about 35% on Google and about 25% on Microsoft year over year, due to the lower competition for keyword ad placements.

Shopping campaigns, now mostly Performance Max (PMax) on Google, are down around 50% in costs per click year over year. The conversion rates are also down in PMax compared to Smart Shopping campaigns due to a lack of control. 

How to take advantage of lower CPMs

When you look at the higher-funnel campaign types, display costs per click are trending down.

The exact amount is difficult to measure since most clients have decreased their prospecting spend, which tends to be cheaper due to a larger audience, and increased their remarketing spend, which tends to be more expensive.

However, both Facebook/Instagram (Meta) Ads and LinkedIn Ads costs are significantly decreased year over year with CPM (cost per thousand impressions) decreasing 50-75% for Perfect Search Media clients.

These trends show that many businesses are cutting more high funnel ad spend than search and shopping conversion spending. Therefore, there is more opportunity to reach your audience cheaply on display and social media right now.

Why you shouldn’t cut your spend during a downturn

Although most businesses feel the need to tighten spend during an economic downturn, a slow economic environment can yield greater returns for companies that do not cut back on their ad spend.

Not only can you reach a larger audience with your ad budget since cost per click decreases on all of the ad platforms. While they’re priced by competition and demand, you also can experience an increase in conversion rates. Consumers are still purchasing and there are fewer companies vying for their consideration.

There is even more opportunity on social media and display ad networks which see a larger spend slowdown than bottom-funnel search campaigns. This is a time when businesses can increase their market share by showing in front of customers that are deciding what to purchase while competitors wait for a better market and often are too slow to restart advertising.

Contact Perfect Search Media if you want to get started with advertising in this economic downturn and take advantage of your competitors dropping out of the market!

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Emily Lutz
Director of Strategy

Emily Lutz is from Kalispell, Montana and has been camping more times than she can count. She geeks out over musicals and the TV show Firefly (yes, she’s on some chat sites). Before joining Perfect Search, Emily was a zookeeper for ten years.

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