The San Francisco-based gifts marketer is running the SEM gamut: buying thousands of keywords for sponsored links and feeding its pages to the engines in an optimized format to bring up better results on regular searches.

RedEnvelope has direct relationships with Google, LookSmart and Overture, and works with a number of search engine optimizers (consultants who try to help companies raise their sites’ rankings in searches), according to Polly Bickel, online marketing manager at RedEnvelope.

Bickel says search is the marketing channel with the highest acquisition rate for RedEnvelope: 80% to 85% of its search customers are new customers. “In terms of ad cost, it’s not as effective as e-mail, obviously, but it’s more effective than the portals.”

SEM is particularly appropriate to the gifts business, remarks Chas Akers, vice president of marketing. “People search for occasions and specific terms such as ‘gift baskets,’” he says.

RedEnvelope submits its keywords to the search engines with a tracking URL. “We track all our results [using DoubleClick’s Dart software] by individual keyword so that even if we have 1,000 keywords with Overture we understand how many clicks, the conversion rate, the average order value and the total revenues from each of those keywords,” Bickel explains. “Essentially, we optimize all of our search campaigns on a keyword-level basis.”

All this data is fed into the company’s customer file.

“We’re very lucky in that we work with Overture on a thousand keywords but we feed them a report and they optimize to a certain ad cost,” Bickel says. “We have to hit a certain level of ROI for all our campaigns so we essentially optimize based on what that metric is. For every dollar we spend, ideally we want to get $6 or $7 back.”

Search marketing is 5% of RedEnvelope’s online budget, Bickel says. And, search marketing is cost effective enough that it accounts for 10% of online marketing’s sales.

Bickel reports that RedEnvelope buys anywhere from 150 to over 1,000 keywords with each search engine. “Our effective cost-per-click [CPC] ranges anywhere from 20 to 40 cents, depending on the keyword and the engine.”

She agrees with Akers that search marketing is especially good for RedEnvelope because it’s a gift business, with over 1,000 products.

One of the top-performing keywords is one of the items, “lucky bamboo” (bamboo stalks). Generally the keywords are geared to three areas: products, brands and occasions (“birthday gift” or “thank you gift”).

After its own brand name, best-performing keywords include “anniversary gifts” and words such as “gifts for him,” “gifts for her,” and “gifts for kids”—the word “gifts” alone does not work well because it’s too broad a term.

SEM performs so well that the company is working to increase it to 15% of online marketing’s sales (from 10% this year), while upping the search marketing effort to only about 8% of the online budget.

“We’re actually now just scratching the surface,” Bickel says.

“It’s more scaleable than people think.”