Behind the click: Why AI is making Search ads costlier

The digital advertising landscape is undergoing a seismic shift, with Google Search serving as the epicentre of this transformation. As we begin to navigate through 2025, marketers and the brands they advise are grappling with rising costs and evolving strategies in paid search advertising, driven by the integration of AI and changing user behaviours.

While Google may well have seen its global market share in Search advertising dip a fraction below 90% in the last three months of 2024, for the first time in nearly a decade, it still is the largest player in the game, outpacing its competitors by leagues, not mere miles. In India, where it is more than comfortable in Search advertising at more than 97% market share, it's where more paid search dollars, or rather rupees, go, and they’re just going up.

Market evolution

Recent industry data paints a compelling picture of this shift. According to reports, Google Search ad spends climbed 10% year-over-year in Q4 2024, while click growth remained steady at 3%. This disparity, coupled with a 7% rise in cost per click (CPC), underscores the growing challenge for advertisers to maintain their return on investment. The introduction of AI-driven features, such as Google Gemini, is reshaping the advertising ecosystem, improving ad targeting and relevance, but also intensifying competition among advertisers.

Preetham Venkky, Chief Digital Officer at DDB Mudra Group, highlights how Google Search has transitioned from delivering ‘first-level’ content to ‘second-level’ content, providing users with more concise and specific answers. This evolution, he explained, has fundamentally changed how brands approach content creation, with a focus on long-tail keywords and niche-specific content to capture organic traffic.

However, the introduction of AI-driven overviews in Google Search has disrupted this strategy. “The problem is that the top blurb now actually covers up more of the screen than before,” says Venkky, adding that this change has dramatically reduced the depth of information users seek, as they often get the gist of their queries from this overview.

Gopa Menon, Chief Growth Officer at Successive Digital, acknowledges this evolving landscape. “We're seeing shifts in ad performance across various industries,” Menon notes, highlighting the dual nature of this change.

While some advertisers face increased competition and rising Costs Per Lead (CPL), especially in segments like education, with reports suggesting increases of up to 50-100% in certain cases, others are discovering fresh avenues to connect with their target audience through AI-powered innovations.

Bigger Picture says Smaller Figures

However, Venkky estimates that the cost of advertising on Google Search could increase by 15-30% in many categories, dismissing the idea of sustained, up to 50% increases as unrealistic. “That kind of increase will be short-lived,” he said, explaining that advertisers may temporarily spend more to meet immediate goals, but such spikes are not sustainable in the long term. He also noted that sectors like SaaS, real estate, and automotive would continue to invest in paid search due to their higher returns, while others with thinner margins might opt out altogether.

Another digital industry expert cited similar numbers, noting, “From what I have seen. CPL across categories is going up by 12-15% and Impressions are down by 20% because of these recent enhancements and changes.”

Gandharv Sachdeva, Country Head, India, Hybrid, agree that while these advancements have improved ad performance, this has also driven up costs, with some industries experiencing cost-per-click CPC increases of up to 30%, with reports showing an 11% year-over-year increase in Google search ad spending in Q3 2024. “This dynamic creates a trade-off for marketers: while AI improves ad efficiency and audience precision, it also intensifies competition for prime placements, making discoverability more expensive,” he says.

However, Venkky emphasizes that the rising cost of paid search stems from reduced visibility and increased competition. He notes that some categories can absorb the rising Customer Acquisition Costs (CAC) due to high Customer Lifetime Value (CLTV), such as SaaS, automotive, and real estate. For example, real estate advertisers justify high CACs because their products, often valued in crores, allow for higher acquisition budgets. “You’re selling something, let’s say, Rs 2 or 3 crore, and your customer acquisition cost runs into a lakh or a lakh and a half rupees, ” he explains.

However, in low-margin industries like electronics, the rising CAC often makes paid search unsustainable. “The margins are too low,” states Venkky, citing products like phones and appliances as examples. He explains that in these sectors, advertisers might increasingly rely on organic content strategies instead of paid campaigns, and indeed, might eventually opt out of paid search entirely.

That being said, the search advertising market in India is projected to grow by 10.11% between 2025 and 2028, outpacing the global average and potentially reaching a market volume of US$2.9 billion by 2028, from an estimated ad spend on search of around $2.2 billion in 2023. This growth is fuelled by the rapid development of internet infrastructure and the increasing affordability of internet-enabled devices in the country.

Advertisers are embracing AI technologies to automate bidding, targeting, and ad creation, thereby enhancing efficiency and performance. However, Menon cautions against complete reliance on AI algorithms, advocating for a balanced approach. “While allowing AI Algorithms to take control, keeping a close eye on bids and other things manually is also very important as sometimes these tend to go into an overrun,” he advises.

All In for AI?

However, Amit Verma, co-founder and CEO of DigitUp, argues that Google Search has become more intelligent with AI integration, leading to more precise ad targeting. Verma illustrates this with a comparative scenario. “Earlier, people looking for information were sometimes shown advertisements even if they were not looking for it. Now, Google clearly finds the right intent and only shows relevant ads.”

In fact, Venkky observes that CAC is influenced by both the total volume of search in a category and the level of competition. “If there is zero competition, the bid rate will lower to whatever the basic cost,” he notes, but adding, “The fact is that in a bidding system, there’s always a second bidder, even if you don’t have ten bidders." This competition ensures that costs remain elevated, particularly in categories where search intent is high.

He cites categories such as B2B sales and subscription-based services as examples where advertisers can justify the rising costs by reflecting them in future pricing models. “Subscription-based models will pay money because they know that they can ladder you up into a different price maybe six, twelve, or eighteen months after you’ve sunk,” he explains.

The search advertising market is projected to reach a staggering US$417.4 billion by 2028, growing at a compound annual growth rate (CAGR) of 7.67% from 2025 to 2028. This figure underscores the continued importance of search in the marketing mix, despite the rise of other digital channels.

Google’s VP of Global Search Ads has described the ongoing changes as a “seismic shift” that could surpass the impact of the mobile revolution. Queries of five or more words are growing 1.5 times faster than shorter queries, indicating a shift towards more complex search behaviors, as seen by the rise of alternate AI-powered search engines like SearchGPT and Perplexity AI. This evolution is driving Google to invest heavily in technologies like broad match and AI Overviews.

Meanwhile, Verma challenges the notion of lower ad visibility, stating, “Google is not a roadside hoarding which will always be available for whoever can pay. It is a platform where people find information according to what they are looking for.” He points to the rising sales figures and the success of D2C businesses, which have grown into Rs 3000 crore enterprises without physical stores, as evidence of the effectiveness of current search advertising strategies.