The days of being able to promote your business for free on the web are fast running out. Online advertising will account for 2% of all UK advertising expenditure by the end of 2004, already reaching 1.5% this year, according to the Interactive Advertising Bureau (IAB). It's deemed to be more efficient than traditional advertising media, more targeted, yet to have unparalleled market reach (how else could you reach an international audience so immediately and at relatively low cost?). No wonder the various portals, web directories and search engines have started cashing in.

The number of different options for online marketing is growing too. Today you can pay companies to "optimise" your website so that more search engines pick it up when returning query results; you can pay to guarantee that your website comes up when consumers search on certain keywords; you can buy banner advertising on a wide range of web locations; or you can pay to get your website listed in various online business directories.

So which way should you go? Website optimisation companies will charge anything from £70 a month to optimise the content of your website to ensure that search engines are more likely to find it when doing "natural" searches (producing results that haven't been "bought" by advertisers). The process involves making sure common search terms (keywords) are included in the text, and that these are further highlighted using meta tags and link text.

Yet, as interest in paid-for placements (carefully disguised sponsorship) continues to grow, it's getting harder for "natural" search results to top the results, strengthening the case for search engine-based advertising.

"It's about putting your website in the greatest stream of traffic," explains Marcos Richardson, European director at WebtraffiQ, which measures the effectiveness of companies' websites by monitoring the visitors they attract. "Yes, all companies that register with search engines can have a standard listing, but potential customers stand a lesser chance of coming across your site as there are now so many listed companies to choose from. The evidence suggests that a browser will give up after the third page of a Google listing, so if you aren't in the top 30 you're far less likely to get a click-through."

In Richardson's view, paying for a higher "placement" (by sponsoring a keyword) is little different from buying placed advertising in a traditional magazine. The cunning part, however, is that those who pay for their search engine placements, and therefore get more traffic, are then more likely to rise up the natural search listings because a common criterion for a higher "editorial" ranking is how often the site is being viewed by consumers.

Being ranked "naturally" by a search engine isn't all plain sailing anyway. What many firms don't realise when they design their website is that this is only the start of the process - and the cost. They then need to submit the site to each of the search companies. Some marketing agencies claim you need to resubmit your site every couple of weeks, which is no small feat given that every search engine has slightly different criteria for submission. And LookSmart's Submit-a-Site service alone costs £149 plus VAT. And then there's Yahoo, and so on.

Again, you can get someone to manage all of this for you - for an additional fee. Marketing agency New Brand Vision, which has just launched an online marketing service aimed at small businesses, provides software that automatically submits a website to the various search engines every two weeks, for a matter of £150 a year.

But when you're a small business, it's not quantity of business leads that counts, but quality. So if you're a team of three dressmakers based in Wigan, Lancashire, do you really want to risk over-extending your business by trying to attract customers from the length and breadth of the country, or beyond?

A better alternative might be to focus your attention on the classified directories, such as Yell.com (the online version of Yellow Pages), Scoot, or ThomsonLocal.com. These offer more targeted search options which, at least in theory, means that each time a business's details are presented to a consumer this should result in a concrete sales lead. And of course the online directory market is currently benefiting nicely from the chaos surrounding telephone-based directory enquiry services, following the demise of BT's 192.

Yell.com claims to be the UK's leading online classified directory service, featuring some 1.7m classified businesses in the UK, which are listed by name, geographical region and activity. As with their paper equivalents, these directories offer a range of paid-for advertising options. In Yell.com's case, these range from "enhanced" listings (starting at £119 a year) to adverts like those seen in the paper directories (from £149 a year), links to your company's website (from £259 a year) and banner ads (from £300 a year).

As well as being able to exploit their strong offline brands, the big online directories are cross-linked with the major portals, so a listed business should also expect to see its details in the web results for these services.

Yet Gerard Liston, managing director of www.smallbiz.uk.com, a website offering advice and resources to SMEs, believes that large, mainstream directory sites get a mixed reaction from small businesses. "Small Þrms are necessarily prudent about how they spend their limited promotional budget," he says. "Many are sceptical about websites that make inflated promises about their ability to reach millions."

Smallbiz prefers to work with free directory services such as AskAlix and thelocalweb.net. "They make an attractive alternative to the conventional, high-profile directory brands," he says.

But do they have the same breadth and quality of audience? "Business directories should be chosen with care," warns Marcus Austin, editor-in-chief at www.startups.co.uk, a website offering information and advice to new businesses. "There are an awful lot of them but only very few are used. If you want to opt for more specialised services, make sure they provide a recognised audit of their distribution." AskAlix enjoys exposure through big-brand partner portals such as Dun & Bradstreet, and Barclays' Clearlybusiness. Meanwhile Netscape's Open Directory (www.dmoz.org.add.html) is syndicated by search engines such as Google, Lycos and AOL.

So there are still some free options for companies that have time rather than money to invest in online promotional activities.

Yet it's worth remembering that online marketing remains just one of several routes to pulling in new prospects: it's essential not to neglect more traditional forms of advertising.

Paradoxically, these can represent the most effective ways of promoting your website, according to Mike Davis, a senior research analyst at Butler Group. "Many people still prefer paper-based directories, especially if they're searching for a particular type of firm in their own area," he says.

"Even if they want to look you up on the internet, they'll often get your web address from print media.

"There's even a monthly, paper-based index of the best websites that you can pick up at your local newsagent."

So make sure you've got these bases covered too.

Network marketing

· Four months ago, Daniella Clayton set up her own multi-level marketing business, linked to a billion-dollar health and weight loss organisation in the US. The business, www.egoldenopportunity.com, has two strands selling personal consultancy-based weight loss and health solutions to consumers, and recruiting new home-based sales people to the business.

Clayton does all her advertising on the internet, where she spends £100 a month targeting people wanting to lose weight and £300 a month on recruitment.

But how did she know where to spend her budget? Clayton says she has learnt a lot from her fellow network marketers.

"I was approached by a web search optimisation company, but was told not to touch it as there had been cases of people spending thousands and getting nowhere," she says.

A lot of Clayton's advertising is keyword based, particularly for recruitment. "Here, I'm aiming at people who've been made redundant, badly paid professions like teaching, or mothers who want an income but want to work from home."

One valuable tip when investing in paid placements with search engines was to keep per-click costs down by settling for a lower ranking than the number one slot. While the top slot might cost 50p per click, the sixth might only be 5p. "It's just as visible and may actually be seen as more credible," Clayton notes. "The beauty of keyword-based advertising is that you can test your budget monthly. You pay per day based on how many people click through to your site, and can set an upper limit on how much you're prepared to spend."

Clayton, who has already made £1,500 profit in the four months since starting her business and claims the projections are "fantastic", describes search-based marketing as an "incredible medium". "It gets into all the nooks and crannies," she says. She particularly likes the ability to target audiences by country. "As the UK market for weight-loss solutions slows down for winter, I can target the southern hemisphere."