may the force be with you

Summary:
Search engines extract too much of the Web's value, leaving too little for the websites that actually create the content. Liberation from search dependency is a strategic imperative for both websites and software vendors.

I worry that search engines are sucking out too much of the Web's value, acting as leeches on companies that create the very source materials the search engines index.

We've known since AltaVista's launch in 1995 that search is one of the Web’s most important services. Users rely on search to find what they want among the teeming masses of pages. Recently, however, people have begun using search engines as answer engines to directly access what they want -- often without truly engaging with the websites that provide (and pay for) the services.

The obscene profitability of search advertising has made many search sites offer a broad variety of non-search services as loss-leaders to drive traffic to their search pages. Among the free offerings are services such as satellite photos and online maps, email, photo hosting, natural language translation, and search of the user's local hard drive.

Free services are obviously nice for users, at least on first analysis. (A second look shows that users will suffer under a lack of diversity if all that's offered are services that are good at driving traffic to the search engines.) Whatever the case for users, free search engine services take a clear toll elsewhere. As explained in a sidebar, the cost of ownership for "free" software can easily exceed $1M/year in an enterprise setting.

There's no doubt that search engines provide a valuable service to users. The issue here is what search engines do to the companies they feed on -- the companies that fund the creation of original information. Search engines mainly build their business on other websites' content. The traditional analysis has been that search engines amply return the favor by directing traffic to these sites. While there's still some truth to that, the scenario is changing.

Search Bids Eat the Gains of Site Improvement

Paid search confiscates too much of a website's value. Since we're currently running a lot of user studies of B2B sites, let's take a B2B example: Consider a site where the average order is $1,000 (quite modest for B2B) and has a conversion rate of 1%. That is, for every 100 users, the site closes one sale (either directly on the site, or indirectly after passing the lead to the sales channel). This amounts to sales of $10 per visitor. If we further assume a contribution margin of 40% after deducting COGS (cost of goods sold) and other marginal expenses, the site makes $4 per visitor.

Given these assumptions, the site can pay up to $3.99 for each click on its search engine ads, as long as the ads are sufficiently targeted to sustain the 1% conversion rate.

Now, experience shows that the average website can double its conversion rate by doing user testing and redesigning for increased usability. If our sample site runs a good usability project, it can therefore expect to see a conversion rate of 2%. Thus, for every 100 users, the site will close two orders and make $2,000 in sales and $800 in contribution margin.

As long as the competing sites stay the same, the managers of our sample site are happy: they still pay only $3.99 per click, so they pay $399 for the 100 clicks and their profit increases from $1 to $401 as a consequence of site improvements.

Alas, competing companies also read the Alertbox column and have their own usability projects. Thus, given time, the competing sites will also double their conversion rates and can then afford to double the bids for their search keywords.

If your search bid stays the same, your ad will sink off the page as more and more competing sites improve their design enough to afford higher bids. Our site therefore has no choice but to increase its own bid to $7.99 per click if it wants to stay in business.

In the long run, every time companies increase the value of their online businesses, they end up handing over all that added value to the search engines. Any gain is temporary; once competing sites improve their profit-per-visitor enough to increase their search bids, they'll drive up everybody's cost of traffic.

This is great news for search engines: they can double their income by doing nothing. Just sit and wait for all other websites to improve -- then skim off the increased earnings.

So, why should non-search sites improve if the search engines collect all the gains? There are two reasons:

• Do nothing and you'll disappear when your competitors improve enough to easily outbid you and therefore consume all the space on the first search engine results page. (All studies, including our own, show that more than 90% of users never go beyond the initial SERP.)
• While search engines will take all the profits from users who arrive from search ads, you get to keep the increased earnings from all other users. Thus, non-search users become the true source of added value from website improvements.

In addition to paid search listings, websites also often receive search traffic from free, so-called organic listings. These visitors are obviously no problem, except that you can't count on them as a sustainable strategy, since organic listings can change without notice.

Liberating Websites From Search Engines

Despite search engines, websites can make money. The key is to recognize that, while search engines might take all the value from an initial user visit, you get to keep the value from any non-search business. Thus, you must foster customer loyalty so that users go straight to your site instead of clicking through from search ads.

I predict that liberation from search engines will be one of the biggest strategic issues for websites in the coming years. The question is: How can websites devote more of their budgets to keeping customers, rather than simply advertising for new visitors? Here are some ideas, ranging from the proven (newsletters) to the speculative (mobile services):

• Email newsletters. Getting people to sign up for regular newsletters remains the ultimate way to maintain a relationship. As usability studies show, a newsletter has much more of an emotional impact on people than a brief visit to a website.
• Request marketing. Have users tell you what they want, and then alert them when you have it.
• Discussion groups and other community features. Find ways to recognize particularly active members and thus further connect them to your site. Such recognition might be as simple as placing gold stars on their profiles or might include more substantial loyal-user benefits.
• Affiliate programs. These are alliances with other sites that promote your services to their users in return for a referral fee if their users do business with you. The program works best if the referring site can honestly recommend the destination site to its own target audience. So, even though you have to pay them a cut, the cost isn't boundless the way it is on search engines because you're not competing with all other sites in the world for the right to be listed. If you're the best match for the referring site's audience, they'll want you -- rather than simply whoever offers the highest fee -- because your conversion rate will be better. (In an earlier column, I offer an example in which sales differed drastically depending on which affiliate partner a site chose to link to.)
• Newsfeeds. RSS might work, but I don't know yet as we're not starting our user research into RSS until next week. (We'll present findings about RSS usability at our upcoming conference.)
• Stick your URL onto any physical product you sell in the hope that customers will see it when they need supplies or a replacement.
• A hardware component that's hardwired to connect to your site's service. Without the iPod, the iTunes music store wouldn't be nearly as successful.
• Mobile features. Search engines' back-and-forth interaction style is clumsier on mobile devices. Conversely, mobile provides added value for services that know their users and understand sufficient context to give them exactly what they need, when they need it -- perhaps without their having to ask. Thus, users are more likely to actually subscribe to mobile services than to seek them out every time they feel the need. Being an icon on somebody's BlackBerry gives you top-of-mind presence and significantly increases the likelihood that that they'll visit your website when they want to do business. (You might even get paid for the mobile service -- but even without payment, it's worth it in search-liberation points.)

In the dot-com bubble days, it was fashionable to discuss website stickiness. Now, stickiness must be reconceptualized for the real world rather than the bubble. It's not a goal to make users spend hours on your site. Let them go about their business.

The real goal is to make users come back, and to have them come directly to your site instead of clicking on expensive ads. The ideas above are just a few ways to encourage repeat business. Further in-depth studies of user behaviors and customer needs should reveal many new ways of keeping users loyal.

source:http://www.useit.com/alertbox/search_engines.html