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Nowhere to Go But Up

  |  August 23, 2001   |  Comments

Many advertisers with a significant Web presence are hardcore direct-response advertisers. They know exactly how much they want to pay to make a sale. Tom calls into question the model that they are using and points out just how silly it is.

It's been a rough week. Engage, a long-time sponsor of my column, decided to abandon its media business. The Industry Standard, a magazine I considered the publication of record for the dot-com biz, called it quits. A few other media sellers are breathing their last. And once again, I hear the voices of the people who just don't get it.

"The accountability and the measurability of the medium is what's killing it," they say. "Prices plunge because advertisers know exactly what they're getting from their online ads, and it isn't enough to justify the cost."

I've written about measurement in the past and about getting rid of the click as our industry's default success measurement. This isn't another one of those articles in which I rail against the click for 10 paragraphs and then suggest other success measurements to use in its place. Rather, I want to call attention to the model that many online advertisers are using, and I want to point out exactly how silly it is.

Many of the advertisers who have a significant presence in Web advertising are hardcore direct-response advertisers. They know exactly how much they want to pay to make a sale, and they use their historical click rates and conversion rates to develop a model that they use to justify ridiculously low cost per clicks (CPCs) and cost per actions (CPAs) to publishers. Some of those publishers are stuck with tons of remnant inventory, so they take the deal, figuring that it's better to get something for their perishable inventory than to get nothing.

Many of the online direct-response deals are structured in the same fashion. The advertiser runs acquisition ads, hoping to get prospects to click to a transactional page. The advertiser then hopes to get enough of those people to buy at the transactional page to justify the cost of the advertising. Given the current market, advertisers have been able to shift most of their risk to publishers by paying for the ads on a CPA or CPC basis. Anybody see a flaw in this model?

Let me demonstrate the inherent flaw by example. Let's say that Widget.com can spend $10 to generate a widget sale on its Web site. So it places acquisition ads all over the Web to try to sell widgets. Assume that Widget.com has employed an ad agency full of online media buyers who can't negotiate their way out of a paper bag and that the average cost per thousand (CPM) for the acquisition ads ends up being $10. Let's say that Widget.com's agency puts together some fairly good creative executions that achieve a 0.2 percent click-through rate (CTR). This means that Widget.com will have to pay $10 to get two people to come to its transactional page. If 5 percent of the people visiting the transactional site convert, Widget.com will end up paying $100 to make a sale, well above the acceptable $10.

For a second, forget about the branding from the ads. Forget about the people who click on the ads, decide they don't want to buy right away, but come back later. Forget about traffic the transactional page gets from the search engines. Does anybody find anything wrong with the fact that Widget.com brings people to its pages and then discards them if they don't buy?

As I've mentioned in previous articles, not every product sold on the Web is a click-to-buy product. Some products need more than a moment's consideration before a prospect will purchase them. If you're selling a $2,500 laptop, you had better believe that only the most wealthy and mentally unstable of your potential customers are buying your product on a click-to-buy basis.

Advertisers generally know this, but they still use their click-to-buy metrics to continually force prices lower and lower. In the above example, Widget.com will look to reduce its CPM to 10 percent of that of the original buy ($1.00), or it will look to pay on a CPC or CPA basis. On a CPC basis, the breakeven point is at $0.50 per click. No serious publisher can support itself on that kind of revenue.

Now, what happens to Widget.com's numbers if instead of sending people to its transactional page it collects the email addresses of interested prospects and continually mines those leads over time? Using rich media to collect the prospect's email address directly within the ad will yield better opt-in rates than GIF banners will yield click rates. Let's go with a conservative opt-in rate of 1.0 percent. It now costs $1 to get an email lead at the $10 CPM quoted above.

Widget.com can market to each of those leads over time via email, provided that it has obtained the proper permission from the consumer. Mining the leads over time, the conversion rate may rise to 10 or 15 percent or even higher. Now, we're talking sales at less than $10 a piece, within the acceptable range. Sure, there will be costs to implement an ongoing email campaign to convert customers, but it's a drop in the bucket when compared with the cost of continuing to toss out perfectly good leads.

I get asked quite a bit about what the industry as a whole can do to ensure its survival. It's quite simple, really. For online advertising to survive, we need publishers to provide venues in which to advertise. These publishers have to be able to derive enough revenue from advertising to cover the costs of providing content via the Web. To do so, publishers can't allow bottom-feeding direct-response advertisers to force poorly conceived models on them in order to justify $3 CPMs and $0.10 CPCs.

The costs of online advertising are as low as they can be. Prices have to come up from here, or we won't have any venues left in which to advertise. Advertisers have to learn to refine their models and be more realistic about what they hope to achieve with their online advertising. Publishers have absorbed as much of the risk as they possibly can. It's now time for the marketers to refine their techniques and lead the charge.

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ABOUT THE AUTHOR

Tom Hespos

Tom Hespos heads up the interactive media department at Mezzina Brown & Partners. He has been involved in online media buying since the commercial explosion of the Web and has worked at such firms as Young & Rubicam, K2 Design, NOVO Interactive/Blue Marble ACG, and his own independent consulting practice, Underscore Inc. For more information, please visit the Mezzina Brown Web site. He can be reached at thespos@mezzinabrown.com.

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