Retailers' 2005 Online Advertising Outlook

Two weeks ago, I attended Shop.org’s FirstLook 2005 conference, one of the premier events for the online retail industry. Conference sessions were helpful for overview information, but I also sat down with the retailers directly and probed on my own. What kind of online advertising did they do in 2004? What worked, and what didn’t? Did they execute their buys in-house, or outsource? What trends did they notice in online advertising? What did they plan to do in 2005, and to what extent?

2004 in Review

In 2004, the majority of online retailers relied on their own in-house email lists, not online advertising, to drive the most cost-effective, productive traffic to their sites. If you buy pay-per-click (PPC) search engine traffic, you’re in luck — these buys were a close second. Comparison search engine (shopping search) buys trailed behind PPC, affiliate marketing, and SEO (define). Portal buys, network buys, and other online placements didn’t even make the list.

A few retailers I spoke with did test other placements. They learned, it seems, the impression-based buy is DOA for e-tailers. These buys simply don’t meet tough return-on-investment (ROI) metrics. Portal buys aren’t far behind. Interestingly, of the portals, AOL seems to be a clear winner over direct competitors Yahoo and MSN. But even AOL-derived sales were flat over 2003 figures. This can’t bode well for the big portals.

Controlled Costs and Performance Buys Make the Cut

General CPC (define), or performance-based buys, showed some promise. E-tailers seem willing to expand these types of buys in 2005. Although not a single retailer I spoke with ruled out pop-up ads, most refuse to have anything to do with adware advertising. The biggest concern seems to be a sense consumers can’t distinguish between ad- and spyware, so why bother?

Comparison search appears to be gaining ground. “I see a sea change in the way online retailers view shopping search,” Iggy Fanlo, Shopping.com’s chief revenue officer, told me. “Today, 85 percent of the top 100 brands have a presence there.” Retailers, including Best Buy, plan to increase their shopping search spends in 2005, though several say they’ll be more selective in the year to come.

Offers That Pulled Best

As any good direct marketer knows, ad placement is only part of the equation. The offer in the creative plays a critical role in both attracting and converting traffic for online retailers. The two best-performing offers in 2004 were conditional free shipping and free gift with purchase. Some creative retailers, such as L.L.Bean, tested variations on these offers. Value shipping starting at $2.00 worked well. Others, such as Bass Pro Shops, have even found success in running sweepstakes, promoted through online ad buys.

Predictions for 2005

Online media buyers servicing the online retail sector won’t have it easier in 2005. Though retailers such as Nokia’s Tony Curtis believe more dollars will be spent online, retailers are getting much more savvy about where they’ll spend their money and what they expect in return.

There may be several growth opportunities if publishers are willing to be flexible. One is advertorials. E-tailers see real value in content and are already building more content into their own Web sites. Through Web analytics, Bass Pro Shop has been able to demonstrate content drives higher lifetime value and increases average order size more than anything else it’s done on its site. Driving traffic and conversions from paid advertising content, therefore, seems a natural transition.

E-tailers had low awareness of certain ad opportunities, including contextual placements, such as Google’s AdSense, as well as sponsorships and product placements. I think there’s a chance these placement types will gain traction.

In search, e-tailers will continue to sharpen their pencils, culling PPC terms that become too expensive for ROI benchmarks. I believe, and have had my suspicions confirmed by several retailers, the quantity of PPC terms in a campaign will diminish. Roger Bensinger, SVP of Sharper Image, made a noteworthy comment. During the holiday season, he wished he’d sacrificed some of his normal PPC ROI in favor of increasing traffic, generating more sales, and, ultimately, acquiring more new-to-files.

Finally, the retail sector is mixed when it comes to opinions on outsourcing online media buying this year. Some companies refuse to let anything go out of house; others believe in outsourcing. Those who manage search engine PPC campaigns or shopping search data feeds either internally or through a traditional ad agency seem more inclined to move to an SEM firm in 2005. Overall, agencies that know how to work performance-based ad buys will succeed with online retail clients.

Meet Hollis at Search Engine Strategies in New York City, February 28-March 3.