What you need to know:

• Performance ad price inflation and customer acquisition costs are soaring, particularly in retail sectors with agencies reporting double digit hikes every quarter YoY.
• Yet as cost per click prices climb, CPMs for YouTube appear to be plummeting, with some suggestion that the aggressive rollout of automated buying and optimisation platforms is correlated to those declines as lower value inventory is bundled in.
• Some analysts see little chance of major advertisers balking at rising performance ad prices any time soon – and zero chance of marketers swinging back to brand on that basis.
• But locally firms like Temple & Webster have recently starting ramping up brand spend while pointing out declining ROI and rising customer acquisition costs for performance channels, which have more than doubled in five years.
• Meanwhile Google’s move to AI Overviews is crimping organic search results, with agencies reporting 20-25 per cent drops in click through rates.
• But chatbot search blips are throwing up some interesting results for the likes of Intrepid Travel, with customer chief Leigh Barnes reporting 90 per cent organic search gains.

Suncorp's Executive General Manager for Brand & Customer Experience, Mim Haysom noted consumer search queries around insurance spiked 50 per cent earlier this year as the cost of living crisis triggered more value hunting. That rise, she says, is now up about 35 per cent year-on-year and there was an "opportunity to pump more money into search to capture that demand in the market ... so I've obviously been doing that."

The Catch-22 for Haysom is that many of her marketing peers and competitors are doing the same. Haysom has a workaround but the net result is surging performance marketing costs for everyone.

Most performance marketing operatives in Australia are in solidarity – price inflation for response-driven media, and associated customer acquisition costs (CAC) – are running hot and will only get hotter.

Google and Meta are the primary beneficiaries as customer acquisition costs have doubled in the past five years.

(The exception on price inflation is YouTube, where CPMs have crashed amid huge ad load inflation via YouTube Shorts – as explained by Adgile Media MD, Shaun Lohman here. Lohman suggests YouTube’s claims and numbers defy physics, and suspects Google’s automated ad buying tool PMax may be a key factor).

Sparro by Brainlabs, one of Australia’s largest specialist performance agencies handling upwards of $220m in spend for search and social, ran the numbers for Mi3 (see the table below, showing weighted average price increases on Meta and Google channels per quarter over calendar 2024).

The top line is that performance costs have soared well above inflation, though agency co-founder Cameron Bryant caveats that Sparro’s client base is retail skewed.

Bryant suggests some of the price inflation is down to demand: marketers are under pressure for quantifiable quick returns and so are yanking performance levers hard, with increased competition also driving up bids; and some is down to falling click through rates of organic search as Google shifts to AI Overviews (rival agency Atomic suggests CTRs have crashed 20-25 per cent as a direct result of AI Overviews).

Either way, Bryant agrees there is a direct link to rising prices and Google and Meta moving to “black box” models in PMax and Advantage+, which place ads across the platform’s respective properties and use AI/machine learning algorithms to determine who to target with which ads on which channel, based on parameters advertisers set – e.g. new customer acquisition or return on ad spend – optimising creative and messaging on the fly.

Results vs. hikes

Bryant said marketers are piling into those black boxes, but black box or otherwise, suggested if sustained price inflation continues, “the market will balk at it at some point”. 

“There are multiple parts to those price increases. The main one is that marketers are looking [acutely] at that bottom funnel, they want results now. Maybe they haven’t invested enough in their top of funnel, they haven’t invested in creative,” he said.

“That means more competition, which means the cost of ads is going up. Advertisers are willing to pay for that at the moment, because it drives results.”

Bryant suggests there are other factors at play – such as Google changing the way auctions are won from a second to first price model, plus advertisers working to different metrics, some on cost per acquisition (CPA), some on return on ad spend (ROAS), for example.

“We’ve all got different levels of bidding for what we are trying to achieve. So they [Google] can sort of get away with increasing that auction,” said Bryant. “But also, there's more competition, so that they can get away with pushing prices up within that.”

But he underlines that retail marketers “will definitely get results” from Pmax and that adoption is increasing.

“PMax is ultimately shopping placements, which has always performed well: you want a rug, you search for a rug, you see a rug, you buy the rug. It's all pretty easy. PMax allows you to do that, but it’s also done remarketing within that, it’s also done search ads within that, it's also done video ads within that.

“What gets lost in there is that Google was maybe able to add a little bit of extra cost to some of those different things,” per Bryant.

“I guess it's become that Google is able to do whatever they want in that environment.”

Balk point approaching?

Bryant pointed to Temple & Webster’s recent results by way of example. The online furniture pureplay’s first half results show significant rises in marketing spend – up 23 per cent to $50m for the half year – the vast bulk of which is spent on performance ads.

“Quite a big part of that is probably going to be PMax and those retail brands it works well for – the JB Hi-Fis, the Harvey Normans – they are going to be spending there, Woolies and Coles too,” said Bryant.

“But I wouldn’t expect to see an NRMA Insurance-type client there.”

Temple & Webster’s filing underlines the rate of performance price inflation – doubling in five years, from CAC at $44 in Dec 2019 to $91 in Dec 24.

It likewise highlights knock-on effects on ROI, which has fallen almost 40 per cent over the same period – MMM firm Mutinex recently made similar directional observations. Hence Temple & Webster last year starting to invest in brand advertising, stating it will spend upwards of $10m on brand channels this year as a result, with brand spend increasing in the second half as it bids to rebalance.

Sparro’s Bryant thinks sustained price inflation will likely lead other brands to rethink channel allocation – in line with the unit economics impacts investment banker turned ecom entrepreneur Carla Penn-Kahn unpacked via this Mi3 podcast.

“If it doesn't make sense to run a business and spend money on these channels, they have to shift ... We are certainly seeing people diversify,” said Bryant. “We’re seeing big increases into Pinterest where it makes sense, huge increases into TikTok, with brands building specific creative in the platform and seeing some unbelievable results. Snap [investment] is increasing as well for certain audiences.”

Upper funnel is seeing some movement, Bryant suggests, with the likes of “Spotify, digital out of home and BVOD” getting more attention. “Certainly people are looking around to see better value than they might get at that bottom of funnel.”

Existential agency threat?

Sparro’s charts show inflation across the board – except for YouTube, where prices have tanked. Bryant’s theory is that YouTube has tweaked its formats, primarily a shift to non-skippable ads, but that fundamentally, “there’s more ads”, which in turn means CPMs drop further. Others, such as Adgile Media boss Shaun Lohman, agree breaking down just how many more ads have been loaded into YouTube via Shorts – and the relationship with the simultaneous growth of PMax – here.

Bryant sees growth in the platform black boxes only going one way, with PMax already moving up the funnel.

“They are rolling it out to more and more clients. It is certainly a KPI for people to be able to sell it and create more platforms like this. The next one for the middle funnel is called Demand Gen. They are rolling out PMax for leads, Pmax for this, Pmax for that… So it will continue to grow.”

Doesn’t that level of automation and opacity present a competitive threat to agencies? Bryant admits it does, but said the agency is building out its own controls, APIs and IP to better work and interrogate the system and measure the results. “You’ve got to be in it to win it, so how can you best control those platforms to gain best advantage?”

The PMax migration

Sascha Bonomally, GM of Growth Operations at Atomic 212, has a view on search price inflation and why Google is increasingly moving money around.

“We know [Google] artificially increases CPCs [cost per click prices] because they admitted it in the DOJ lawsuit. However, what I think they are also doing is almost deflating the price of formats like Pmax and Demand Gen. When I look at CPCs across all of our accounts, they have changed from $1.28 to $1.26 this year. That is actually a [price] drop, but it isn't coming from traditional search/keyword campaigns, it is coming from clients moving to Pmax,” said Bonomally.

“They want to move as many advertisers to Pmax because there is more inventory they can sell. With search only, they are limited by the number of searches. But if they package them up with display and video they can sell more – and because they are blending the metrics we don't know how the performance is split.”

He gave the following example of how that might look:

“So you think it is performing better, but I think [Google] are making one of those channels artificially lower so they can sell more of the other inventory,” suggested Bonomally. “Then when everyone is using Pmax they'll increase it.”

Buckley’s on brand rebalance

Brian Wieser, principal at media analyst Madison and Wall, is not convinced big brands are buying into the big platforms' automated black boxes just yet.

“Every agency group wants to be able to do the reseller thing ... And they absolutely do want to be able to sell this product through, but they also can't force the clients to do this stuff. [Brands] don't like the black boxes, generally speaking … They're not buying the Pmax/Advantage+ black boxes, as far as I know. But I think that will change over time.”

Either way, Wieser doesn’t see major advertisers balking at rising performance ad prices any time soon – and zero chance of marketers swinging back to brand on that basis.

“I'd argue that pricing almost never impacts budgets. Pricing is a consequence of budget, not the other way [around],” said Wieser. “In other words, pricing is an input, not an output.

“When you think about how budgets get allocated, the prices just dictate how much inventory you get inside of a given medium or media owner. It doesn't dictate your budget, because most marketers allocate budget based on percentage of revenue basis.”

So no brand investment increases on the horizon as a result of spiralling performance ads prices?

“Absolutely not. Again it is not about pricing. Price is the consequence of demand for the media.”

CLV pushback?

At a local level, others are less sure. One Australian consultant who works with multiple brands on re-orientation and re-organising sees a swing back to brand and performance pullback already in play, particularly in categories where search costs are soaring but where the channel is increasingly yielding higher cost, poor quality acquisitions, increasing churn, and eroding margin.

Sustained pressure on household finances amid soaring customer acquisition costs are compounding the problem.

“We found this with a utilities client recently. The customers that are clicking on the deal through search etcetera are very often bargain hunters looking for a deal. For a lot of businesses, they are the highest cost customers, because they churn quickly. You think you've got them in the door on your amazing search strategy, but they're searching again in the next quarter when their bill comes in, and they'll just keep jumping. In some instances, it takes up to eight months to get a return on a customer acquired through search, but three months in, they're churned out.”

Hence ROI on those channels is increasingly challenged.

“It's like this vortex: They are bad customers – you never return the value and the cost of getting the next person in the door has gone up exponentially because of the marketplace dynamics.”

The consultant said he recently explained this to a senior marketer “who should know better … I literally drew it on a board – the more they spent on search, the higher the churn rate went up. Yet when we walk clients through it, they say ‘okay, I get that, but it’s probably not going to change’. Why? ‘Because that is all I know.’

Negative impacts are exacerbated when marketing teams are working solely to KPIs for acquisition, yet churn rates are torpedoing KPIs for customer teams.

”We tell them to pull back. Search is like a bad drug … and one that means you tend to put out sharper and sharper offers [to maintain the acquisition rate]. So it is a vortex of pain they are getting themselves into, but they don’t know how to get out.”

The utilities client cited by the consultant did ultimately take action.

“We rebalanced their brand and performance budget, got a new brand agency on board and started talking about the big picture things that they needed. All of a sudden, their acquisition didn't go through the roof, but it did increase – and more importantly, the quality increased: It was the type of customers that they wanted.”

Australia’s more sophisticated advertisers are similarly swinging harder toward customer lifetime value as a core KPI over cost per acquisition, per Mi3’s FY25 customer and marketing benchmarks report, which surveyed 105 marketing and customer chiefs collectively overseeing $3bn in Australian marketing investment.

(Yet the benchmark report also found almost half of senior marketers – 43 per cent – said performance or lower funnel investment would rise over the current financial year.)

The consultant thinks brands – and agencies – would benefit from better understanding the nuances of Binet & Field’s 60:40 rule for different categories. For some the ratios are much different, and applying a blanket rule of thumb and template approach can do more harm than good.

Either way, will Australia see a drop off in performance investment this year due to spiralling price inflation and a flip to brand?

“I think so, because it becomes very simple economics … it's just not paying the dividends that it's promised … and I think there's some really good examples in market,” he said. “Look at the work that Telstra is doing. Insurance, financial services – automotive is really swinging back into brand. When the carmakers are skewing to brand, you know that's the canary in the coal mine. So the short answer is yes, I'm already seeing it.”

Suncorp: More on both

Mim Haysom, EGM Brand & Customer Experience at Suncorp, has seen competitive performance-brand dynamics and tensions intensify of late.

“We are seeing a whole lot more people shopping in insurance, so there are a lot more people searching in the market.

“Search terms around insurance are about 35 per cent [up] now, but earlier in the year they were about 50 per cent up year on year,” she told a recent Mi3 sponsored podcast.

“So that cost of living crisis, we're seeing it play out with people looking to get a better deal, a better value proposition. With that, there is opportunity to pump more money into search to capture that demand in the market. So I've absolutely been doing that,” said Haysom.

“But what I've been doing is writing business cases to say: ‘There's demand in the market. If we want to capture it, I need incremental money to put into those bottom funnel acquisition channels. We don't touch brand, because if you haven't got that awareness and consideration – in insurance, if you're not building trust in your brand, then people won't convert at the lower levels anyway’.”

Suncorp has posted strong financial results of late. Is Haysom confident she could keep brand budgets ringfenced if the business was under pressure?

“I think the balance would still be there [even if the overall quantum changes]… because I think I've got the relationship in the organisation, that there is recognition of the importance of brand and building brand and creating compelling customer value propositions through the brands. That's how we drive consideration and conversion. It's not just being in search channels – that's absolutely a really powerful short-term acquisition lever, but there's recognition in the organisation and a sophistication in the organisation … that brand and customer value propositions matter.”

But Haysom says it is down to marketers to make the case.

“If you give a CFO a data point where he can make a very linear connection between a piece of activity on a platform and a business outcome, if you haven't done that other piece of education around the power of creativity and connecting with humans through emotion, through storytelling, that left brain stuff is going to win every time.”

AI Overviews: Plunging CTRs

The flip side to paid search price inflation is that Google’ shift to AI Overviews (unpacked here) is starting to have major impacts on organic search.

In short, agencies report click through rates are plummeting, with organic results pushed further down the page, which means brands have much sharper incentives to pay to play, fuelling competition, further pushing up paid search prices.

Atomic 212 and Alley Group told Mi3 that organic search effectiveness is tumbling following Google’s shift to AI overviews. “We are seeing a continual drop in CTR and traffic,” per Alley's Gary Nissim, though he didn’t quantify it.

Atomic 212 head of SEO, Stephen Downward, did. Aggregating the data across 30-plus clients since November (when AI Overviews began to roll out in Australia), he said the firm has “observed that informational searches, most notably questions based queries – what, how etcetera – have seen a 20-25 per cent reduction in click through rates despite the average rank remaining stable. This is certainly a result of AI Overviews”.

Laurence O’Toole, CEO at London-based Authoritas, ran the numbers for an early AI Overviews study jointly commissioned by UK publishers, Hearst, Daily Mail and Trinity Mirror along with Press Gazette, Australia's Mi3 and Ricky Sutton's Future Media. He then unpacked what marketers and agencies should do about it.

As Australian search agencies now see those double-digit CTR declines coming through, “the story is very similar over here [in the UK],” said O’Toole.

“Google has decided not to break down CTR percentage data in Google Search Console for AI Overviews. Worse still, it awards all ranking pages in the AI Overview 'position one' when scrolled into view or clicked, which makes the data very messy indeed.”

He said Authoritas has built an algorithm that “mashes up Google Search Console data” with its AI Overviews-enabled rank tracker data over time to try gauge the impact on click through rates, which it has been “running privately for a few clients”.

It’s not easy, “as it requires running thousands of keywords daily” to spot the differences in CTR percentages, clicks and impressions per O’Toole. 

The data is client confidential so he can’t share the results – but is hoping to conduct an anonymised public study this year.

But O’Toole did share broad observations:

• When the search engine results page (SERP) has an AI Overview you can expect average click through rate percentages to be about half the level of SERPs without an AI Overview.
• If you rank in the top two AI Overviews (so you are visible without a user clicking 'show more' to expand the AI Overview) then you get a marginal improvement in the CTR percentage, but it is still much less than if the SERP had no AIO at all
• Even if you rank in the first page of organic results and are visible in the top two AIOs, expect CTR percentages to be 30-40 per cent lower than they would be if you had a first page organic ranking on a SERP without an AIO.

Chatbot blips emerge

The next looming impact on search is via LLMs. It’s small fry for now, but the blips are starting to show up.

“I aggregated all our GA accounts and looked at sessions from ChatGPT and it's increasing significantly in the last six months,” per Atomic 212’s Sascha Bonomally.

Alley Group's Gary Nissim said the firm’s data shows a similar adoption curve – though with variances by category.

“AI chatbot traffic is increasing exponentially,” per Nissim, (though he adds that data for Feb 25 is not a full month in the first chart below). 

The second chart shows while increasing, overall site traffic from chatbots is still extremely low in the bigger scheme of things, per Nissim, with consulting services seeing by far the biggest impact, followed by legal services, though he caveats the data is only taken from a small sample – sub 50 GA accounts, though Alley Group is now working on a deeper, broader dive for Mi3.

While the major chatbots aren’t yet serving ads, “In terms of ChatGPT, I have noticed that it is appearing more as a referral domain recently,” per Atomic 212’s Sascha Bonomally. “The results in ChatGPT can serve product results.”

Chatbots: Upside potential

AI chatbot impact on search for brands is showing upside for some.

Leigh Barnes, Americas President and Chief Customer Officer at global Australian travel firm Intrepid, said organic search was powering for the company: “In January, [organic] searches for our brand were up 90 per cent.”

He thinks that’s partly a result of all the brand investment Intrepid is making as it bids to crack the US market – “I keep getting told that we’re crazy for doing so much brand work in the USA” – but also because “more customers are going through ChatGTP or copilot to whittle down their search preferences, especially in travel. So they go to ChatGPT, ask questions, filter it down and then go to search,” says Barnes.

“So either two things are happening: generally more people are knowing us; or we’ve done a good enough job [on content, reviews etc.,] so that when people are asking AIs the questions, that we pop out.”

Either way, search is powering. “Which is the opposite [effect from AI] to what I’m hearing from a lot of people. They’re seeing reductions in the travel space on the amount of search for their brand.”