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]
Ever since Google acquired 
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