SHOP price hike suggests increased profitability in Q2

Look at what just  cropped up on one of the Webmaster message boards. A merchant that advertises with Shopping.com just posted the following:

I just received the new Shopping.com minimum CPC [cost per click] rates that go into effect 2/1/05:

The most notable subcat increases are:

Electronics -> Flat Panel TV's - $.40 to $1.00
Health & Beauty -> All SubCat's - $.15 to $.50
Home & Garden -> Small Appliances - $.30 to $.50
Jewelry -> Watches - $.40 to $1.00
Kids & Family -> Strollers, Car Seats, Cribs & Carriers - $.30 to $.75
Office - MultiMedia Projectors - $.40 to $1.00

He then adds:

I think Shopping.com's pricing increase is partly due to the availability of conversion data from their advertisers.

Quick thoughts:

  • The price per click that advertisers and merchants are willing to pay is determined by their return on investment. Because return on investment for PPC ads is still strong, the cost of PPC advertising
    is rising.
  • That's further fueled by two factors: (1) More merchants buying ads drives up PPC prices. This is particularly true as more offline merchants move online. (2) As ecommerce businesses become more efficient, for example by using analytics to reduce the rate of shopping cart abandonment, their profitability goes up. That raises their ROI on PPC ads, which in turn drives a further price rise for PPC ads since PPC ad pricing is determined by auction.
  • Because comparison shopping has far higher
    conversion rates than general search, there's probably a lot more room
    for prices to rise.
  • Smart move by Shopping.com to provide
    merchants with free tools to evaluate their return on investment from
    their Shopping.com ads. The tools demonstrate to the merchants that
    they can afford to pay more, and also provide that data to Shopping.com.

Stock impact:

  1. Shopping.com's management recently stated at the SSB conference that it planned to raise prices. But it gave no indication of the size of the price increases.
  2. From this data, the price increases seem large. Suggests potential
    upside to Shopping.com's 2005 numbers. For example, if the minimum PPC
    on flat panel TVs goes from $0.40 to $1, flat panel TVs are big sellers
    during 2005, and the popularity of comparison shopping continues to
    grow, then revenues from this category could be sharply higher in 2005.
  3. These price rises suggest the comparison shopping companies have
    lots of pricing power. The post mentions that Bizrate has also raised
    prices. So no concerns about price competition here. Similar to eBay's price rise.

The message board post quoted in this article is here.

Chart for SHOP below.
Shop

Full disclosure: at the time of writing I own SHOP stock. As always, this is not a recommendation to buy SHOP.