Keyphrase cost inflation has happened faster than we expected, but we still think that small companies should invest heavily in Paid Search relative to other traditional media forms.

The reason for this is that Adwords subverts the typical advertising paradigm. In most advertising spaces, companies get to a size where advertising is as much an exercise in drowning out the competition as it is in getting their message out. Typical advertising lends itself nicely to this. Examples of this are yellow pages ads, billboards, advertising on buildings, radio ads, etc. The idea is to completely drown out competitors whenever possible.

Adwords changes things. Adwords (and now Yahoo! with Panama) has two major attributes that can be controlled: the RANK of a bid and its frequency of delivery. A small company could conceivably have ads ranked just as high as large companies if they decided to rotate them less frequently. The closest metaphor would be that they had a huge ad in the yellow pages, but in only 5% of the books.

What does this mean for small business? Well, for one thing, it means that they can effectively get their message out and the cost of that message can actually be commensurate with their size. A smaller company doesn’t have to move as much volume as a large one to be successful, so having more high-quality ads less frequently might be a great strategy. They can maximize their click-through rates with highly placed ads.

More importantly, it lets the smaller company compete on content with the big boys. If a keyphrase-ad combination is a portal, a company’s website is the tool that closes the deal. High-quality websites are surprisingly affordable, which means that a smaller vendor has control over their conversion rates. If a smaller vendor has a better site than one of the big players in a market, they will have higher conversion rates, and their overall cost per sale will be lower.

This, in turn, will give them more money to spend on the frequency that they deliver high quality ads.

So let’s hear it for Google giving a fair shake for the little guys!