Google's halo dims for some e-tailers

Some online retailers have either cut their Google ad budget or are eager to explore alternative online marketing channels. Should Google be worried?

By Parija B. Kavilanz, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- A handful of e-tailers who've found that their business through Google isn't as profitable as it once was are now rushing to park their ad money elsewhere.

Among them is online jewelry seller Ice.com with sales of about $50 million.

Ice.com CEO Shmuel Gniwisch, said this was most evident for his company during this past holiday shopping season, a period that can account for as much as half of a retailer's annual profits and sales.

"What didn't work for some online retailers during the past holiday season may come as a surprise to most [people]. Considering the strength and size of the Internet's largest search engine, Google (Charts) proved to be an extremely poor marketing tool for Ice.com and many of our retail friends," Gniwisch said in an interview.

However, one Google executive said the company is not seeing advertisers are jumping ship en masse. In fact, the Google executive maintains that the company is seeing strong growth in its AdWords advertising marketplace.

AdWords is the name of Google's text-based advertising system used on its Web site and partners' sites. Industry analysts tout it as one of the most efficient and cost-effective forms of online direct marketing.

"We spend a lot of time building our ad service and helping our partners to understand how to best use [the service] and analyze the traffic data," said Richard Holden, head of products for Google AdWords. "A vast majority of our advertisers have clearly seen an increase in their [return on investment]."

Nevertheless, Holden said Google wants to pay attention anytime its advertisers aren't happy. That's not surprising given that Google generates almost all of its revenue from online search ads.

"We're always interested in what our customers have to say and we're happy to discuss their issues with them," Holden said.

Still, Ice.com's Gniwisch complained that while traffic from Ice.com ads featured on Google was up during the holidays, actual "conversions," or the number of people who click the ad and then actually buy an item from Ice.com was "way down."

Although Ice.com reported an increase of 70 percent in holiday sales, Gniwisch said it was "without the help of Google. In fact, [it] failed quite miserably," he said.

In the last quarter, Ice.com spent about $1 million on advertising its brand through Google AdWords. But after the holiday setback, he said the company has decided to slash its Google ad budget by half.

"Three years ago, Google represented 10 percent of our sales. Now its a little more than 1 percent," Gniwisch said.

AdWords lets users create their own ads that appear alongside search results. Google doesn't have fixed prices for ads. Instead, Google lets advertisers bid to buy keywords that best relate to their products and brands.

A higher bid, which can range anywhere from a few cents to a few dollars per day, increases the chances of your ad appearing on top or near the top of the sponsored links.

At the same time, Google also monitors "click through" for sponsored ads. So besides the bid, if your ad generates plenty of clicks, it's more likely to get a higher spot in the ranks. Moreover, advertisers pay Google only when people click on their ads.

So what's the problem? Part of the issue is the evolving dynamics of the e-commerce marketplace.

As e-commerce sales continue to grow at an explosive pace, many more brick-and-mortar retailers (who may or may not sell their products online) are rushing to advertise their brands online.

Because these bigger players have deeper pockets, they're able to outbid their smaller, online competitors and get better ad placement.

"Our click costs are escalating. We're bidding more for keywords, but we're still losing money. AdWords isn't profitable for us anymore," Gniwisch said.

But this may not necessarily be Google's fault. And even Gniwisch admits as much.

"We're not saying it's Google fault. From Google's perspective, it's 'may the best man win.' So the burden is on us to improve our situation," Gniwisch said. "But maybe Google could work with us and help us improve our conversions."

Others, including eBags.com, baby products seller Babyage.com and intimate apparel merchant BareNecessities.com are confronting similar issues.

It is an admittedly small number given the vast universe of merchants and brands using Google. But that number could eventually swell. And names like Ice.com and eBags are e-tailers with prominent brand recognition among consumers and the online retail community.

All four companies appeared on trade publication Internet Retailer's 2006 ranking of the Top 500 e-tailers based on sales.

"From what we're seeing, there's an ongoing reallocation of Google [ad] money into other marketing channels," said Jack Keifer CEO of Babyage.com, adding that e-tailers frustrated with diminishing return-on-investment (ROI) from AdWords are moving over to comparison shopping sites like Shopping.com, Bizrate.com and NexTag.

Last year Babyage.com spent $500,000 on AdWords. Keifer said that for the first time the company, which logged $20 million in sales in 2006, has cut its Google budget by 35 percent for this year.

"It's hard to say if this is a problem with Google or that consumers are reacting differently online," Keifer said. He still thinks Google is the best resource to find what you're looking for but agrees that a "shift" is occurring away from Google because of declining conversion rates.

Dan Sackrowitz, vice president of marketing and business development for BareNecessities.com, said AdWords-related click costs for his company were 50 percent higher this past holiday period versus a year ago, although conversions were about the same.

"We're changing the way we think about Google. Three years ago our Google ad budget would be an infinite amount. Now that our ROI is back down to earth we've set boundaries," Sackrowitz said.

In 2006 eBag.com co-founder Peter Cobb spent $5 to $6 million advertising on Google and used about 70,000 keywords on the Web site. Google-related sales accounted for 25 percent of the company's total sales of more than $100 million last year.

Cobb expects to spend roughly the same amount this year, although he said he's actively developing other ways to retain and draw new customers.

"We're intentionally putting more effort into our loyalty programs," he said. Ice.com's Gniwisch, too, is funneling money into developing blogs, personalized email newsletters and banner ads.

"We already email three newsletters a week, so our customers know about new products, new trends, what celebrities are wearing," he said.

Matthew Greene, CEO of Blue Ribbon Digital, an online advertising and marketing consultancy, said that even though some companies are feeling "annoyed" that costs for using AdWords are increasing, the ad search model still offers the best ROI for e-commerce companies.

"The global issue for both Google and its advertisers is that the search model is nearing saturation," said Greene. If that's the case, then it's a problem not only for industry leader Google but others like Yahoo (Charts), which is the No. 2 player in online search.

Indeed, Ice.com's Gniwisch and BabyAge.com's Keifer said they were equally concerned about Yahoo not being as profitable for their business as it once was.

If that's the case, then for 2007, Greene said e-tailers should rethink their strategies and look at the overall online opportunity.

"Combine AdWords with newsletters, (online) yellow pages, banners. Don't be myopic and focus only on the one big channel that happens to be Google."

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.