Online Advertising May Cost More Than You Think

Like most marketers, you probably consider online advertising less expensive than other media. You probably think you have a good sense of your average cost per action (CPA). But do you really know how much you spend to acquire customers online?

Online advertising’s measurability provides marketers with a false sense of security. They think they can easily track relevant costs. When calculating fully loaded CPA, advertisers often overlook many costs beyond ad creation and media buys. Overlooked costs include landing pages, formats, and reporting. By increasing expenses, these factors can significantly lower profits.

You may think only purchase-oriented marketers must track these costs. Think again. A return-on-investment (ROI) focus means even brand advertisers must demonstrate how advertising builds loyalty and increase purchase intent.

“Online advertising can be more expensive than other media when you consider fully loaded costs,” says Tom Lynch, VP of advertising for ING. This may sound like heresy, but it isn’t. And it doesn’t mean you should stop advertising online. Lynch remains an online advertising proponent. Like him, you must understand your cost dynamics and how they relate to revenues.

Begin by determining customer lifetime value by media and offer. This enables you to know where to spend advertising resources to optimize your investment. To that end, you must measure fully loaded CPA.

Strategically, online advertising is important in a mix to effectively reach your target in a fragmented media landscape. Online advertising can appeal to potential customers while they’re involved in related activities. This improves the ability to influence purchase intent. Spending more should yield better-performing customers, offset some costs, and increase profits.

Hidden CPA Cost Checklist

To measure your true online CPA, consider all components needed to effectively run an efficient campaign. Don’t think because you measure CPMs (define) or CPCs (define), fully loaded costs don’t count. You must still look at comparable alternatives. Hidden costs include:

  • Precampaign testing. Identify target customers on potential sites. Evaluate them, develop success metrics, and create a final plan. This can take a few days or several weeks. Often, this cost isn’t factored in. Yet with an annual $50,000 media spend, one week of testing costs roughly $1,000.

  • Ad formats. Though publishers use at least one or two standard Interactive Advertising Bureau (IAB) formats, they may also have unique ones. Additionally, advertisers may tailor a message to each site. As a result, a simple campaign may require over 10 different executions. Even with established concepts, banners can run $50-1,000, depending on type.
  • Media formats. Special technologies or formats, such as rich media, can aid response and break through clutter, but for a price. Each format may involve different creative executions. Publishers’ requirements may differ.
  • Ad fatigue. Online ads tend to wear out sooner than other ad media, such as TV. You must therefore refresh or change creative more frequently.
  • Landing pages. Tailored landing pages convert prospects. Test what works best for your product. Without constant monitoring and revision, landing-page performance suffers. Code pages to effectively optimize performance on a site-by-site basis. For instance, does a yellow starburst perform better than a white bubble bearing the same message?
  • Ad serving. Consider third-party ad-serving costs carefully, especially when negotiating payment on a CPA basis with publishers. Carat Interactive VP Judy Gern considers this one of online advertising’s dirty little secrets. If you only measure post-click conversions, the publisher can serve a CPA-based campaign without ad-serving costs.

    If post-view conversions are important to measure acquisitions, the campaign must be served from your third-party ad-serving system. This can significantly increase costs. “If your conversion rates are higher, yielding more customers, the impact is reduced,” Gern notes. “Ad-serving costs can hurt CPA deals when conversions are relatively low.”

    For example, you negotiate a $60 CPA deal and track post-click and post-view conversions. The publisher projects serving 10 million impressions to profitably meet your metrics. If this campaign yields 50 new customers and ad serving costs $0.05 CPM, your CPA increases 17 percent over projected costs when both media and ad-serving costs are included. (Note: This isn’t a fully loaded CPA as it doesn’t include creative, landing pages, etc.):

    • Revised CPA = (media cost + ad-serving cost)/number of actions

    • [($60.00 x 50) + ((10,000,000 x $0.05)/1,000)]/50
    • [$3,000 + ($500,000/1,000)]/50
    • [$3,000 + $500]/50
    • $70.00

  • Tracking. Precise campaign tracking is one online advertising benefit, but it’s no silver bullet. Post-view actions (e.g., when users see an ad and visit the site later) can be difficult to trace. Pixel tracking by source can help address this problem.

    Running databases and systems to optimize conversion can be done in-house or purchased. Costs vary, but they’re expensive to build and maintain. You can use on-site reporting and individual landing pages by site or third-party ad-serving technology for uniform reporting of impressions, clicks, and conversions. These systems help centralize data but create additional costs that many advertisers forget to budget on a product or campaign level. In-house staff dedicated to advertising analysis often isn’t attributed to marketing spend.

  • Complexity. This cost is difficult to quantify and rarely appears on an invoice. It’s the time your staff and agency spend orchestrating the optimal campaign across creative executions, sites, formats, and landing pages.

Determine fully loaded CPA, either in aggregate or by site or ad as follows:

Fully loaded CPA = total marketing costs/number of actions

To determine total marketing costs:

Total marketing costs = [testing + total ad creation + media + special formats + total landing pages + ad serving + tracking + other]

To truly evaluate an online campaign’s ROI, monitor, analyze, and appraise campaigns. “Smart marketers track ROI from click [to] purchase to understand how to improve their advertising and processes,” says Will Margiloff, eXact Advertising’s CEO. “It’s critical to understand the entire experience, from how potential customers got there in the first place to why they leave.”

If you don’t buy media correctly, create tailored ads and landing pages, test different creative and offers, and track properly, a campaign yields less than optimal results. The synergy of all these factors boosts response.

Online advertising costs really add up. The saving grace is it’s targetable, traceable, and measurable. It’s up to you to make sure every dollar spent truly pays off.

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