The search engine marketing industry will continue to strengthen over the next 12 months, but Google's dominance of the market could harm firms, according to a new report by e-commerce consultants E-consultancy and search agency Neutralize.

The UK Search Engine Marketing Report 2007 found that over 60 percent of companies are planning to increase their budget for paid search and invest more in search engine optimisation over the next year. Over half said they spend more than £10,000 a year on paid search, while a quarter said they spend over £100,000 annually.

Google was praised by most respondents as the best search engine for return on investment (ROI), but 54 percent said they believe it has an "unhealthy dominance" in the UK search engine marketplace, and 60 percent of respondents said it presents a risk of some sort to their business.

"Google gets so much traffic it makes sense for businesses to focus their search engine marketing there," explained E-consultancy's head of research, Linus Gregoriadis. "But on the flipside, it's risky for them to have all their eggs in one basket to such an extent – Yahoo, and MSN are lagging so far behind it’s a concern for businesses."

The report also found that click costs are reducing the ROI from search of nearly half of respondents.

"The rising costs are a phenomenon of a high growth industry – the days when you could bid on sponsored listings cheaply and list highly are gone," argued Gregoriadis.

Shaun Ryan of site search and merchandising solutions provider SLI Systems said that rising costs could force more firms to invest in search engine optimisation (SEO) rather than paid search.

"It will also force companies to measure their return on investment, improve their conversion rates and increase the lifetime value of their customers," Ryan added.

The report also found that many firms still do not have web analytics tools in place to measure the ROI in search marketing campaigns. Four out of 10 search marketers do not know their ROI from paid search and 61 percent said they do not know their ROI from SEO.

Ben King, strategic director of internet applications development specialist bit10, said that even firms that do have web analytics tools often do not know how to get value from them.