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Online Marketing's Rising Cost

  |  December 20, 2004   |  Comments

Businesses hoping to expand their online marketing in 2005 will see it become increasingly complex... and costly.

Suddenly, the end of the year is in sight. Where did 2004 go? As the year draws to a close, between holiday preparations and the in-laws' arrival, it's time to look back at the last 12 months and forward to the next 12.

In terms of the online media industry, 2004 has been a good year. Investment in online advertising and media owner revenues have grown considerably. Jupiter Research forecasts $7.6 billion will be spent in the U.S. on all forms of online advertising by the end of 2004 (up 20 percent from 2003). In Europe, that total will be €2.1 billion ($2.8 billion), up 35 percent. These growth rates outperform all other advertising channels.

These are impressive growth rates. The main beneficiaries will be the search engines, Google in particular. These gateways to the Internet have successfully cashed in on enabling marketers, both large and small, to access a rich seam of self-targeted prospects through paid listings and keyword sponsorship. The business potential of search engines was epitomized by the Google IPO in the middle of year. Paid search was the fastest growing and most dynamic area of online advertising in 2004 and will continue to be so in 2005 as it establishes itself as the cornerstone of the online mix.

Other key winners in this marketplace will be Internet portals, such as AOL, MSN, Yahoo, and local market variants. These multinational Internet giants offer the highest traffic content, the best online audience reach, and the most diverse advertising opportunities. Furthermore, ad-serving technology platforms, such as DoubleClick, 24/7 Real Media, Atlas DMT; digital media agencies, such as Carat, MediaCom, and i-level; and creative agencies, such as AKQA, AGENCY.COM, and Digitas all had a successful 2004. Online finally shook off its troubles and reestablished itself as a viable, grown-up industry.

Everyone in the industry is looking forward to more success in 2005.

However, marketers looking to acquire or retain customers through online media, whether as novices or seasoned pros, have their work cut out for them. The cost of implementing and managing campaigns is likely to grow, and the renowned cost efficiency of digital media will be harder to achieve. A number of factors will raise participation costs. That will lead conversion rates rising if return on investment (ROI) is not to slip downwards. More marketers will come online and competition to attract online consumers will intensify. Supply and demand will increase the cost of online real estate as marketers seek to secure premium inventory spots.

This is already happening in paid search, where auction-style keyword bidding drives up prices, and forces marketers to up the ante or select new keywords. It's also likely to happen in Web site media, where publishers are charging a premium for value-added inventory. To establish an online presence and attract audiences, online marketing campaigns' scope and scale will have to grow, demanding bigger budgets.

Marketers will look to a wider range of formats and ad opportunities to stand out from the crowd. Advertisers are increasingly adopting high-impact rich media formats to differentiate themselves. These come at a premium and are inherently more complex to implement. With rising prices and broadening campaign activity, maximizing efficiencies and optimizing will become even more critical. Marketers must find more resources (whether internally or externally) purely to manage ongoing campaign activity.

Along with these issues, marketers now must persuade an ever-more wary online audience while complying with increasingly stringent rules, regulations, and best practice codes. Online consumers are growing more experienced and confident. They're less willing to accept intrusive commercial messages, increasingly likely to adopt ad-blocking software, and less inclined to respond to irrelevant communications. They're assisted by increased consumer protection legislation and industry initiatives to counter unwanted advertising. E-mail marketing in particular is growing more complex and costly. Legitimate permission-based senders must differentiate themselves by adopting authentication and reputation-based systems and by testing against content filters.

Marketers must to work harder and smarter in 2005 to achieve good results. They should look to improving campaign targeting and relevancy. Behavioral targeting and auto-optimization technologies will see growing interest. Hard-working optimizers will be in great demand.

Happy holidays and a prosperous 2005 to you all, wherever you sit within the online marketing sector!


Julian Smith

Julian Smith conducts research and analysis on the European interactive marketing and advertising arena as an analyst with Jupiter Research, which shares a parent company with ClickZ.

His areas of expertise cover all aspects of the online advertising industry, e-mail marketing, mobile (SMS/MMS) marketing, search engine marketing, eCRM, online branding and Web site design. His particular area of interest is in the use of digital media for the acquisition, retention and development of customers.

Prior to joining Jupiter Research, Julian spent over six years working in a variety of interactive marketing agencies in London. These included Razorfish, Euro RSCG Interaction and TBWA/GGT where he worked in strategy and client service roles helping develop online solutions for leading blue chip clients. Most recently he assisted in the integrated marketing launch of 3, the new 3G video mobile phone, one of the largest new product launches in the UK in 2003.

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