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With all that’s happening with the economy as of late I’ve been very interested to learn how the current and future economic state will affect the search marketing industry. Lauren Capp is a good friend (who has been featured on the Squareoak blog before) who is an economic consultant for a research firm in New York City.

Hi Lauren! Thank you for taking the time to talk with us today.

My Pleasure

I’d like to pick your brain about how the economy’s downturn might affect the search marketing industry. Year to date, Google’s stock is down, Yahoo is laying off between 10 and 20 percent of its staff…things seem to be happening that would indicate an economic recession. As search marketers, what do you think would be the best indicators to look at in order to best gauge how our industry is going to perform?

I would expect that search marketing would fit general advertising trends, at least to some extent. It’s expected that advertising will trail the economy in a recession: advertising budgets are usually committed in advance, companies don’t want to cut back on advertising and decrease their sales unless it’s clear that consumer spending is going to be less responsive to advertising, and they’re not likely to make big moves on their advertising budgets until they feel the effects of decreased revenues. Search marketing isn’t exactly like other advertising, however. Search marketing seems a little more essential than a huge Superbowl ad, for one. Also, search marketing — just because of the nature of the internet — can be more international than other advertising, so it might be less affected by a US recession. But it is certainly not immune — and when consumers stop buying as many goods online and companies don’t have the money to spend on campaigns anymore, search marketers are sure to feel that.

So say the economy is totally screwed and we are in fact going into a recession. Do you have any advice on how to protect ourselves?

Well let’s first back up to how that would even affect you. A lot of people will speculate on it — but to find out with a little more specificity, you’d want to regress, or find the correlation, between overall advertising budgets and various economic indicators we’re seeing now — consumer goods (particularly non-essential goods), changes in the Dow, the consumer price index, even what people call “leading indicators” like Starbucks revenues (supposedly go down before a recession) or lipstick sales (supposedly go up in a recession because they’re a small indulgence). Once you predict where advertising is going in general, then you want to find trends in online advertising as a part of those overall budgets — if online advertising is growing as a percentage of overall ad spending, then search marketers are much less likely to feel the recession than print media, for instance. Basically, that’s what you want to focus on — showing that returns per dollar spent on search marketing are larger than those for print media — and that those returns are less elastic, or responsive, to overall changes in consumer spending. Furthermore, you’d want to show your customers that search marketing is a necessary cost of doing business – just as important as any of their fixed costs. People aren’t going to take down their company website during a recession unless they’re bankrupt. If people believe that showing up in a search query is just as important as having the website in the first place, they’re not likely to cut down on those budgets.

Also, you could seek out customers in recession-proof industries. These are often thought to include health care, pharmaceuticals, groceries, utilities, and even “necessary vices” like cigarettes and alcohol (but I’d seek out Miller, not Krug)

So for the most part you’re saying that our industry is probably ok? Or at least less susceptible than other advertising channels.

I would think that it should be less susceptible than other advertising channels, but even very recent history reminds us that internet companies like Yahoo are certainly not recession-proof. Nevertheless, there are certainly equity analysts like Piper Jaffray on your side, who say that online advertising should be immune to a recession.

That’s a relief. I just hope I won’t have to get into online lipstick sales [smile]

Another boost to you is that people will be spending a lot on online advertising for the upcoming elections.

This is true…

Looking at Techcrunch today…there is a lot of VC dollars being thrown around. One acquisition includes that of Cleverset for $10 million to Art Technology Group which is an e-commerce software company. If there are people making large investments in e-commerce then I should hope that the online economy has a slightly different agenda.

Certainly. Analysts and investors certainly seem optimistic about online advertising and business, which means that dollars are more likely to be coming your way — but that said, this is a sector that we’ve had little time to observe in terms of how it responds to macroeconomic shocks. Analysts certainly miscalculated the future of wild growth in Silicon Valley. This doesn’t mean that online advertising will follow a similar path, but it does reinforce that a lot of this is pure speculation. Nevertheless, the forecast is good.

So turning back to the US economy as a whole, what are some other economic indicators to look out for? Starbucks sales should drop and lipstick sales go up? What else?

Well, the Conference Board follows an index of leading indicators that are supposed to predict where the US economy is headed. They found that this past December, four of the ten indicators increased: namely, were vendor performance, real money supply, stock prices and manufacturers’ new orders for consumer goods and materials. However, 6 of the ten took a turn for the worse: were building permits, average weekly manufacturing hours, manufacturers’ new orders for nondefense capital goods, average weekly initial claims for unemployment insurance (inverted), index of consumer expectations, and the interest rate spread.

Historically, are presidential elections seen to hurt or help the economy?

The effect of presidential elections on the economy is not uniform, but a study published in the Journal of Financial Research in 2006 finds that in elections that do not have one dominant candidate, stock market volatility (risk) and average returns rise. Also, special interests play a role in elections, and candidate-favored businesses or firms are likely to do better (or worse) based upon polls and eventually, the outcome of an election. I would imagine that if the population considers that the incoming president had a strong economic policy, there would be a short-term positive effect on the economy as a whole and consumer spending. Long-term, any changes would depend on the actual efficacy of the president’s policies. Researchers are puzzled, however, by the fact that the excess return in the stock market is higher in Democratic than in Republican presidencies, which is not explained by business-cycle variables.

I’m not as familiar with how elections affect the economy once it already seems headed for recession — even if there is a significant effect, I’m not sure how long-term this would be. This 2008 election will certainly be driven by economic factors. That’s clear just from hearing the debates so far. People are very concerned about spending policies, balancing the budget, social security, and protectionist/free trade policies.

Well with all that has been said it’s comforting to learn that our industry is more impervious than others when it comes to economic recession. Thank you for taking the time to talk with us about this today.

My pleasure. I’ll keep my fingers crossed. [smile]

As will I [smile]

Last Wednesday Newsweek published an interesting article about how people prefer things or are likely to be associated with things that begin with the same letter as the first letter in their name. For instance an Alex is more likely to grade better and receive an A on a homework assignment than a Dan. Brian is more likely to attend Brandeis, Babson, or Brown University. Tom is more likely to date a Tara, Tina, or Teresa than a Lindsey, Elizabeth, or Kelly.

So my question is, how could this be applied to SEO, SEM, SMO, marketing or online sales in general? One thing you could do is create content or an affiliate program based on the most popular names in English speaking countries. While doing a quick search on most popular US names, this is what comes up as the top five for boys and girls from 1960 – 1990:

The five most popular names of the 1960’s were:
Boys: Michael, David, John, James, Robert
Girls: Lisa, Mary, Susan, Karen, Kimberly

The five most popular names of the 1970’s were:
Boys: Michael, Christopher, Jason, David, James
Girls: Jennifer, Amy, Melissa, Michelle, Kimberly

The five most popular names of the 1980’s were:
Boys: Michael, Christopher, Matthew, Joshua, David
Girls: Jessica, Jennifer, Amanda, Ashley, Sarah

The five most popular names of the 1990’s were:
Boys: Michael, Christopher, Matthew, Joshua, Jacob
Girls: Jessica, Ashley, Emily, Sarah, Samantha

So from this data we could surmise that THE most popular names of children born between 1960 – 1990 start with the letters (M, J, S, A, K).

There are loads of successful ad campaigns that happened when these children became old enough to becoming consumers. Let’s look at some successful ad campaigns from the 1970’s –2000’s that start with or contain the letters (M, J, S, A, K):

Alka-Seltzer, 1970’s
Miller Lite Beer, “Tastes great, less filling”, 1974
Burger King, “Have it your way”, 1973
American Express, “Do you know me?”, 1975
Chanel, “Share the fantasy”, 1979
AT&T, “Reach out and touch someone”, 1979
Molson Beer, Laughing Couple, 1980s
U.S. Army, “Be all that you can be”, 1981
Absolute Vodka: Absolute Bottle, 1981
Apple Computer “1984”, 1984
Levi Jeans, “501 blues”, 1984
Bartles & Jaymes, “Frank and Ed”, 1985
Saturn, “A different kind of company, A different kind of car.”, 1989
California Milk Processor Board, “Got Milk?”, 1993
ESPN Sports, “This is SportsCenter”, 1995

Obviously we would need better data than this to see a relationship between sales and a correlation between the first letter of someone’s name and the products or services they choose to purchase. Based on the data from Newsweek I’d be willing to bet that this information could prove useful for marketing but I don’t think I’m ready to start selling services or writing content whose names or titles only begin with (M, J, S, A, K). However, please note the spelling of the Newsweek article’s title. Think that was intentional?

I love reading about consumer behavior and economic theory because I enjoy making connections that apply to the search marketing industry. Aaron Wall had a post today titled ‘Socionomics & The Wave Principal’, where he references how pessimistic and optimistic emotional states cause a repetitive wave-like flux in economic markets. He then takes this wave principal and applies it to search, publishing, and monetization.

I sent Aaron’s post over to an economist friend (we’ll call her Econo Guest) to get her take on this. Below is her analysis.

Econo Guest: Skeptical about the economic principle, this blog’s interpretation of wave theory, and the exact correlation between the two… The whole idea that markets go in 5 cycles like that contradicts the efficient markets hypothesis, which says markets are efficient (information is readily/immediately accessible, so prices reflect all known information in the market… if people knew there was a “cycle,” they would predict the price declines/jumps and it’d be a moot point). While there are many critiques of and alternatives to market efficiency hypothesis, wave theory is probably one of the less widely academically accepted ones. Regardless, I certainly would have more confidence in one’s ability to game Google than to game the stock market (even if I’m not totally sold on the efficient markets hypothesis).

Mr. Wall also seems to misinterpret wave theory, based on what I’ve read… wave theory is a mathematical principle that tries to analyze pessimism/optimism/”herding” trends in the overall stock market. This blog describes it as though it totally relates to fraud and redefining of rules. Thus I’m skeptical of the correlation — in one case, you’re trying to manipulate information (and the dissemination thereof) directly w/ SEO, while the other strategy attempts to profit from the existence of informational asymmetries ( i.e., people not recognizing there is a market cycle) but does not seek to change them.

Regardless, an interesting idea.

Squareoak: If wave theory is not that academically accepted, what efficient market theories would be more applicable?

Econo Guest: The Fama-French Three Factor Model is said to be able to explain 90% of stock returns. If you can somehow apply this model to SEO then you may have something. Although you might have better luck looking at political and law-making theories. Come to think of it, the Common Pool problem may apply well.

Squareoak: What is the Common Pool Problem?

Econo Guest: The whole idea evolved because oil pools move around and so in Texas they found that people extracted oil much faster than was good for the reserve and the recovery rate (how much oil you could get out of the pool) would wind up lower because everyone would drill too fast so they could get the oil before someone else did. The idea expanded such that people have applied it to pollution where when there is a common resource that cannot be held as property (such as the internet) people will abuse it for their own good (with things like spam), such that the overall utility of the resource is lower, but certain individuals benefit in the short term.

Squareoak: The Common Pool Problem could definitely apply to the internet but the search engines are becoming increasingly better at differentiating quality content from spam. From a search marketing perspective, the best way to keep the resource (internet) from becoming muddled is to create quality content.

Econo Guest: So even though the internet’s not privatized, it can be regulated…interesting.

Econo Guest does some quick research and comes back with this reference to Wikipedia:

Analyzing the design of long-enduring CPR (common property regime) institutions, Elinor Ostrom (1990) identified eight design principles which are prerequisites for a stable CPR arrangement:

1. Clearly defined boundaries
2. Congruence between appropriation and provision rules and local conditions
3. Collective-choice arrangements allowing for the participation of most of the appropriators in the decision making process
4. Effective monitoring by monitors who are part of or accountable to the appropriators
5. Graduated sanctions for appropriators who do not respect community rules
6. Conflict-resolution mechanisms which are cheap and easy of access
7. Minimal recognition of rights to organize (e.g., by the government)
8. In case of larger CPRs: Organization in the form of multiple layers of nested enterprises, with small, local CPRs at their bases.

Econo Guest: So Google is basically a monitor…I’m clearly not the first with this idea

Analyzing the Internet as a Common Pool Resource: The Problem of Network Congestion (pdf)

Squareoak: Very Interesting. So if one can somehow monitor a high demand CPR then this would be an ideal business model?

Econo Guest: Definitely.

Squaroak: Well, I want to thank you for your time today this has been a great session. Will we be hearing more from you in the future?

Econo Guest: Of Course, I’m happy to help.