When Google reported its Q2 earnings yesterday, it beat analyst expectations. But all the news wasn’t good news, at least for Google.

In the area of paid clicks, Google experienced an unhealthy downward trend: total paid clicks declined 2% from Q1 and more importantly, the average cost-per-click (CPC) in the second quarter fell 13% year-over-year.

Data from SEM solutions provider Efficient Frontier’s Customer Index confirms that the downward trend seen in Google’s core business is very real. According to Efficient Frontier, Q2 saw a 20-31% decline in CPCs amongst the advertisers in its Customer Index. Google CPCs dropped 31% while CPCs on Bing and Yahoo dropped 30% and 20%, respectively.

That’s music to the ears of advertisers. According to Efficient Frontier, advertisers have “capitalised on this price reduction and achieved more click volume” while at the same time boosted ROI. Specifically, advertisers in the UK were able to cut their spend 11% year-over-year while boosting ROI by 2%. Across the pond in the US, advertisers fared even better. They were able to reduce spend 21% year-over-year while boosting ROI by a whopping 29%.

The mechanics of this are easy to understand:

  • The recession has reduced demand amongst advertisers. That has depressed CPCs.
  • Advertisers are getting much more savvy with campaign management, resulting in more cost-efficient and cost-effective campaigns.

According to Jonathan Beeston of Efficient Frontier, “We are seeing advertisers make their search marketing budgets work harder than ever before“.

Needless to say, while Google is still raking in the dough, this isn’t great news. And it’s probably even more disturbing to Yahoo and Bing. Obviously CPCs should rise when the economy rebounds but over time, the growing sophistication of advertisers may inhibit a hockey stick rebound in CPCs.

If there’s one key take away from the data, it’s this: now is a great time for advertisers to take advantage of lower CPCs. Now is not the time for strong companies to cut back needlessly. With commitment and prudent campaign management, smart companies have the opportunity grow their businesses cheaper in these tough times.

There is a possible catch however: Efficient Frontier saw its advertiser base increase budgets in May and June and Google reported a 5% increase in average CPC from Q1 to Q2. So if the green shoots of economic recovery are real, this opportunity may not last much longer.

Photo credit: Davichi via Flickr.