Online advertising shows its age

By Jeffrey Rothfeder  |  Posted 04-13-2006

Online advertising shows its age

People like Steve Weber are Google's worst nightmare. Last November, Weber self-published a book about how to sell used books on the Internet.

To promote it, Weber created a three-line text ad that ran on Google Inc.'s site as a sponsored link when people searched for any word, or phrase, in his book's index.

Each time a consumer clicked his ad, Weber paid Google anywhere from 50 cents to 75 cents.

Weber's marketing campaign cost about $4,000 through the end of the year. "But my conversion rate of click-thrus to actual sales was less than 2 percent," says the Falls Church, Va., resident, who also runs an online used-book store. "By my figuring, that means I spent upwards of $100 for each $20 sale."

Unable to make a living on those economics, Weber dropped the Google ads and instead started a blog about bookselling, posting as many as one or two new items a day. Soon, Weber's site was recording more than 100 first-time visitors daily, many of whom signed up to receive an e-mail version of the blog each time it was updated. Through the blog, Weber sold many more books than he did during his attempts at keyword advertising. "Ironically, most people came to my blog from

Google," Weber says. "Using Google as a free search engine to sell books was much more lucrative than paying for advertising."

Nobody would argue that Internet advertising is anything but a robust market. In 2005, Internet advertising revenues rose to an estimated $12.5 billion, a 30 percent increase over the year before, according to the Interactive Advertising Bureau and PricewaterhouseCoopers. Forrester Research Inc. projects that by 2010, the Web ad market will reach $26 billion, or 8 percent of total ad expenditures. Meanwhile, shares in Google, the only pure-play online ad company, have posted one of the most lucrative post-IPO performances in decades; the stock's price-to-earnings ratio was a stratospheric 68 just 16 months after going public.

Yet, despite these results, Weber's experience reveals a dirty little secret about online advertising that many large and small companies have discovered—and that Google, Yahoo! Inc., Microsoft Corp. and any number of other online advertising outfits would prefer to keep under the radar: Response rates can still be disappointingly low. A typical search-engine ad will likely attract, at best, a mere 1 percent to 2 percent of Web surfers who see it, while the response rate for banner ads is well below that, and falling rapidly. And just a small fraction of the people who click through will actually make a purchase, according to Internet marketing experts. In other words, online advertising is about as efficient as a direct-mail campaign.

Of course, a direct-mail campaign would cost quite a bit more than keyword advertising. But the Internet was supposed to far outshine, not merely equal, traditional marketing approaches, thanks to its unique ability to target consumers based on their specific, immediate interests exposed during Web activity. That revolutionary relationship with potential customers, alone, was expected to make the Web the most lucrative marketing medium yet. Now, however, even Internet marketing partisans concede that new ways to deliver online messages and accurately identify potential customers—many of which are in development or just beginning to emerge—are desperately needed before advertisers can realize an acceptable payoff.

"We're just in the first inning of Web advertising," says Matt Moog, president and CEO of Q Interactive, a Chicago-based online ad agency that specializes in generating leads through discount coupons and promotions. "Web advertising has a long way to go before it reaches its potential and provides the sort of returns advertisers want. We have to get response rates well over 10 percent before Web marketers can claim that we're doing a good enough job."

Story Guide:
Online advertising shows its age

  • Banner Year?
  • Word to the Wise
  • Return on Marketing
  • Return Behaviorism
  • Sold on Web Ads

    Next page: Banner Year?

    Banner Year

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    Perhaps the most visible symbol of what's ailing online advertising is the rapid decline of banner ads. When they first appeared at the top of Internet pages less than a decade ago, banners cost about $35 to $80 per thousand impressions (i.e., people who viewed the promotion). That was a bargain: At the low end they cost about one-tenth the price of a full-page ad in a typical business trade magazine. A host of national advertisers—including the Big 3 automakers, major banks and consumer goods companies such as Procter & Gamble Co.—rushed to sign up.

    > But almost immediately it became apparent that something was wrong. Because actual response to ads can be tracked so accurately on the Internet—a capability that has long been the Holy Grail of marketing, and that is virtually impossible with radio, television and magazines—advertisers could calculate their returns on investment. But with initial click-thru rates as low as 2.5 percent in this new medium, banner ads were barely worth the effort. Some advertisers were finding that every 1,000 impressions yielded only about one-quarter of a paying customer.

    Then came the consumer backlash. It didn't take long for Web surfers to see banner ads as an intrusion. Their constant, flashing presence stood in sharp contrast to the perception of the Internet as an open-ended information channel where people could decide for themselves whether they wanted to buy something, or simply browse content for free. Software companies responded to that sentiment by developing programs for blocking banners and other kinds of ads, such as pop-ups. About 20 percent of North American households with online access have installed such software, and another 28 percent say they would like to do so, according to a January 2005 Forrester Research report. And while the price of banner ads has stayed about the same during the past five years or so, their click-thru rate, while never impressive, has dropped precipitously—to less than .5 percent.

    "A lot of companies assumed that moving their offline ads online was enough, and they threw out all of their smart marketing ideas, especially the notion that each medium requires its own unique approach," says Shar VanBoskirk, an analyst at Forrester Research. "Instead of applying disciplined rules and asking tough questions—Who are my customers online? Does this channel catalyze the behavior that I want to drive? Are my customers here?—marketers got excited about this funky, new medium and didn't go through the proper diligence to make sure they were getting the most from it."

    Adds Peter Cashman, a principal at Moon River Pearls, an online jewelry retailer in Old Lyme, Conn.: "Internet advertising is a frustrating business. Like a lot of companies, we've cut our spending back because response rates were too low. But there is a way to make it work: Manage your budget by mixing keywords with blogs and other low-cost marketing approaches." With this strategy, Moon River generates 43 percent of its online sales from pay-per-click advertising and 57 percent from so-called "organic," free searches and repeat customers, says Cashman.

    Story Guide:
    Online advertising shows its age

  • Banner Year?
  • Word to the Wise
  • Return on Marketing
  • Return Behaviorism
  • Sold on Web Ads

    Next page: Word to the Wise

    Word to the Wise


    Keyword ads, primarily on the most popular search engines—Google, Yahoo! and Microsoft's MSN—are supposed to be everything that banner ads weren't. In the first place, they are far less expensive. Companies and individuals place confidential bids for the rights to specific words or phrases that a consumer might type into a search engine; winners usually get top billing for their ads, and the keyword price generally works out to $1 to $2 per click. Moreover, keyword ads can't be hidden by anti-pop-up software, and their content is ostensibly linked directly to what a viewer is currently browsing for.

    TXU Corp., a Dallas-based energy company, learned this in 2002, when the electric utility industry was deregulated in Texas. To sign up new customers, TXU decided to run a keyword ad on Google and Yahoo! using such phrases as "Texas electricity" and "Texas energy deregulation." Because the odds were high that anyone typing in these terms back then was researching electricity alternatives, and because TXU had few rivals bidding up the price for these terms, its click-thru and customer-acquisition response rates rose to the impressive low double digits.

    "The keyword ads delivered new customers at a cost of $1.86 each, and these were people likely to buy electricity from TXU for a long time," says Miki Dzugan, president of Rapport Online Inc., a St. Paul, Minn., online ad agency that developed the TXU campaign. "Our client was giddy about the results. It's still running the ad, and still getting good results."

    Plenty of companies are at least breaking even on their keyword ads, but few are enjoying the robust returns of TXU. Why not? The problem is that, although keyword ads are supposed to target consumer preferences, in reality they are only slightly less scattershot than a targeted TV commercial.

    Some marketing experts downplay the idea that ads must lead directly to a purchase, either online or offline, to have an impact; they maintain that Web ads are not much more capable of ferreting out customers than advertising in other media. These experts argue that building brand image is just as important as making a sale, and that establishing, and maintaining, that image requires that potential customers be exposed to a company's name, and its products, repeatedly. It's a mistake to calculate returns on investment just by following the progress of each click-thru, while neglecting the online ad's role in the company's broader marketing campaign, says Jim Nail, chief strategy and marketing officer at Cymfony Inc., a media-analysis company in Watertown, Mass.

    "As the media mix gets more complicated, marketers are going to have to give up chasing the chimera of 'closed-loop tracking,' " Nail adds. "By its nature, tracking based on 'this ad led to that call which resulted in this sale' ignores the contributions of all the other elements in the mix. In branding, the rule of thumb is that it takes three or four impressions to get the message across. So does that mean that only the last impression was successful? Of course not. But that's what this sort of reasoning implies."

    Story Guide:
    Online advertising shows its age

  • Banner Year?
  • Word to the Wise
  • Return on Marketing
  • Return Behaviorism
  • Sold on Web Ads

    Next page: Return on Marketing

    Return on Marketing


    There are hints that advertiser disenchantment with online advertising may be starting to surface. The recent revelations about Google's slowing growth forced the company's usually closemouthed executive team to admit some hard truths. "Clearly our growth rates are slowing, you see that each and every quarter, and we're going to have to find other ways to monetize the business," said Google Chief Financial Officer George Reyes at an investor conference in late February. "I think we have a lot of growth ahead of us. The question is at what rate."

    Yet it would be foolish to predict anything other than a rosy future for Web advertising. The average person spends about 34 percent of their media time per week online, both for work and personal reasons, according to Forrester Research. And with hundreds of millions of potential consumers around the world surfing the Web at any one time, companies can't help but see dollar signs when they think of the Internet.

    But such growth will only occur if online marketing evolves quickly enough to let companies cut through the clutter and find their individual customers from among the mass of people casually browsing the Web. "So far, no one has really taken advantage of the truly interactive nature of the Internet," says Forrester's VanBoskirk. "The ability to use data and context to provide more relevant advertising will gradually distinguish this medium from anonymous, traditional channels."

    Microsoft's new adCenter, currently being tested, provides clues to what the next generation of Web advertising could hold. By analyzing consumer demographics collected through the Microsoft Passport Network—which includes sites such as MSN, MSNBC and Hotmail—the software giant plans to let keyword advertisers target customers by gender, age, wealth, income, location and time of day, among many other variables.

    This is the most ambitious use of demographic data yet attempted by a Web company, analysts say, but its main contribution could be to rouse rival Yahoo! to adopt a similar system. Yahoo! also knows a lot about consumers, thanks to its own network of sites, and it has been much more adroit than Microsoft at profitably navigating new trends in Web content and design. If Yahoo! does develop its own demographic ad network, as expected, it will likely soon surpass Microsoft, predicted Charlene Li and Hellen Omwando in a March, 2005, Forrester report. Google, whose primary site is its search engine, generally lacks access to demographic information, so the emergence of both adCenter and a Yahoo! derivative could weigh on the company's prospects.

    The value of programs such as adCenter lies not only in highlighting consumers with particular attributes, but also in the rich details such programs can reveal about consumers who click on keyword ads and either decide to make a purchase, or pass up the opportunity. By reverse engineering a click-thru, these programs, for instance, can tell an advertiser that 53 percent of its customers are women, and 95 percent of men who click through make a purchase.

    Google has answered the data call with a program, called Analytics, that assesses the efficacy of keyword campaigns by comparing which terms produce the highest revenue and which sites generate the greatest number of customers. Analytics also has a geographical component that gives companies hard data about where their customers live. Using this information, an e-tailer could determine whether or not a billboard in, say, San Rafael, Calif. had been successful in driving consumers to its site. "Given the right information, we believe that advertisers can control how successful their ads are," says Emily White, Google AdWords online sales and operations director.

    Story Guide:
    Online advertising shows its age

  • Banner Year?
  • Word to the Wise
  • Return on Marketing
  • Return Behaviorism
  • Sold on Web Ads

    Next page: Return Behaviorism

    Behaviorism


    Behavioral marketing, another new Web advertising approach, can get even more precise about consumer activities. One such system, from New York City-based Tacoda Inc., maintains an online advertising network that tracks the browsing and purchasing habits of more than 130 million consumers a month at more than 3,000 Web sites. Consumers are then assigned profiles: A person visiting the auto section of the New York Times Web site several times over a two-week period, for instance, would be tagged as an active auto buyer. Consequently, Tacoda would run a BMW display ad—banner, video or animated ad—the next time this consumer visits one of the company's network sites.

    The value of behavioral marketing was made evident by a Tacoda online campaign for Marysville, Ohio-based Scotts Co. The lawn-care leader ran a series of ads on Weather.com that was viewed by eight million garden enthusiasts, two to four times a month. The response to these ads illustrated the richness of Tacoda's database: Scotts' click-thru rate was 20 percent higher than when it ran untargeted advertising on the same Web site.

    Some Internet marketing executives say that Tacoda and its ilk are working too hard to find consumers that fit specific categories. A much more expedient approach would be to use the Web's interactivity to let individuals self-select the niches they belong in, and then to deliver well-produced, relevant content, supported by advertising, that matches these preferences. New York City-based Narrowstep, for instance, is developing a package of Internet video channels directed at small audiences that have expressed a passionate interest in subjects ranging from cycling and sailing to childcare, and in such cities as Glasgow and London. "The new world on the Internet is not about hundreds of programs or keywords each reaching millions of eyeballs," says Rob Foster, a Narrowstep vice president. "It's about millions of programs each reaching hundreds of eyeballs. As an advertiser, I want to know how small your audience is."

    After years of subpar response rates, it's become clear that the mere presence of a huge volume of consumers and an equally large number of ads in the same place is not enough to sell products by themselves. Now, more artful and lucrative approaches to online marketing appear to be in the offing. It may be that there's no other choice, really. No one wants to see another bubble burst.

    Story Guide:
    Online advertising shows its age

  • Banner Year?
  • Word to the Wise
  • Return on Marketing
  • Return Behaviorism
  • Sold on Web Ads