Online Advertising’s 4 Biggest Problems

(Originally published in iMediaConnection, June 2009) by Eric Picard

Online advertising is going through a vast series of changes right now, and the measure of its future success is going to be set by the decisions made over the next few years. I honestly believe that if we (the folks driving this industry) make the right decisions, we will change the face of advertising and, through those changes, have a huge and significant impact on the economy.

I may be too passionate on the subject, but I believe that our economy is driven in large part by advertising. I see an ad impression as no less than the opportunity to convince a person of the value or relevance of a product or service. And I believe that the ability of a marketer to extend the value proposition of a company out into the world and have that turn into a new relationship with a customer (or to renew a relationship with an existing customer) is an important and beautiful thing.

Of course, many ads that arrive in those locations of opportunity are poorly designed, badly executed, and hold nothing like integrity close to their mission. But that’s a topic for a more philosophical discussion. Today we’re going to talk about the problems that exist in our space, and I’ll do my part to suggest some ways to fix them.

Problem 1

Lack of brand advertiser value

I’m almost certain to get some flak for this topic area. It seems to be an indictment of direct response (DR) advertising, and an endorsement of brand advertising from a philosophical standpoint. So let me address this issue immediately.

I believe that both DR and brand methodologies have immense value. I also believe that advertisers should use DR methodologies in order to drive the consumer from the middle to the end of the purchase funnel with gusto and relish. However, I also happen to believe that advertising should be sold to the right advertiser for the right purpose based specifically on the goal they are trying to achieve, and based on the effectiveness of the methodology for where the consumer exists within the purchase funnel at the moment of ad exposure.

But in online advertising, we’ve focused an immense amount on the requirements of DR, and much less so on brand advertising. This wasn’t so much a mistake, as either an over (or under) focus issue (depending on your perspective). With so much of the revenue coming from paid search in our industry, and the huge focus we’ve had on remnant inventory and contextual, we have lost out on the upper-left quadrant of the chart below, which really would enable us to monetize the audience that exists at the broad opening of the purchase funnel.

In a perfect world, we’d have the ability to be intentional about how we approach potential and existing customers, with the strong opportunity to move the customer through the purchase funnel and to bring them back for more purchases. In this ideal world, the ability to reach desired target audiences with powerful brand messages to increase awareness and drive consideration and purchase intent is a critical requirement.

But rather than thoughtful and appropriate focus on building high-scale, high-throughput, highly automated brand advertising mechanisms, we end up with seemingly never-ending discussions about cost-per-acquisition (CPA) pricing and performance-based metrics. While this is very important stuff for DR advertisers — and maximizing the way we handle about half the current ad dollars spent online is a smart thing — we’ve neglected the brand advertisers. Focus in this area has trended toward so-called “branded entertainment,” fairly custom ad experiences like page takeovers, and some rich media advertising.

What are some of the things that brand advertisers care about when they look to buy ad space? They care about creating brand awareness, getting consumers to form positive opinions of their brands, and driving the customer’s intentions toward a purchase. They typically buy advertising based on their ability to reach a targeted audience that is more likely to purchase their products or services. And publishers should be excited about selling ads to brand advertisers because they buy ad space — not clicks, not conversions. They buy impressions. They care primarily about reach — they want to get a message in front of a consumer.

I placed this item first in my list, because much of my commentary for the other three items should take this starting point into account — none more so than my next item dealing with ineffective creative formats.

Problem 2

Ineffective creative formats

In March, I wrote an article called, “Why online creative stinks so badly.” In that article, I spoke about standard format sizes that are too small and the lack of interactivity that exists in most ads online.

Let’s dig into this just a bit more today. The problem, as I continue to see it, is that we don’t provide the advertiser with a palette that enables the creation of a truly emotional experience. Part of this ties back to the size of the ad. When the current ad formats were standardized in 2002, the average screen resolution was still 800 x 600 pixels. Average screen resolution today is much larger — although I haven’t gotten definitive sources, a safe bet is something like 1280 pixels wide, with a variety of heights due to the proliferation of widescreen ads.

The hallmark online display ad unit is the 300 x 250. This is the unit that most advertisers have adopted as their preference. It generally elicits the highest cost per thousand ads (CPM) and is preferred by brand advertisers as a format in which they can get a decent message across. But as we’ve seen screen sizes (and therefore screen resolutions) grow over the past five years, this has effectively shrunk the pixel size of the ads proportionately downward.

Standard ratio screen resolutions with 300 x 250 ad:

As you can see above, when the average resolution was 800 x 600, a 300 x 250 pixel ad unit was pretty large (from a percentage of screen coverage point of view). But as average screen resolution has pushed upward, the relative size of the ad unit has diminished significantly. In my March article, I suggested that one way we could improve the value of online creative formats for advertisers is simply to increase the size of the standard display unit — effectively double the dimensions of the 300 x 250 banner to 600 x 500 pixels. If we did this, we’d be looking at something like below:

Problem 2, cont.

Ultimately, this focus we’ve had as an industry on static creative formats is probably one of the ways we should try to fix this problem. By moving away from a fixed pixel dimension and moving to scalable ad formats, we could resolve many of the problems here.

This has been something many people have discussed over the years, but they always seem to get hung up on issues related to image quality and layout controls in a scalable scenario. But this isn’t something I worry about too much, as this can be solved by technology.

Ultimately, we need to evolve to a world where creative assets can be rendered at the proper resolution to display high-quality images, video, and text, while providing pixel-level control to advertisers in order to ensure that brand guidelines and creative output are tolerable to discriminating designers. At this point, designers frequently tell me that this isn’t possible, and developers tell me that building such a solution would be very hard. And while it is a hard objective to achieve, it’s completely attainable. Live Technology is one company that is already well on its way to solving this problem, but others are working on it as well.

Despite all my admonitions above about ensuring that we give brand advertisers the love and focus they need and deserve, we should also keep in mind that the DR folks need some attention here as well. When an ad is created with a super strong brand message that drives immense emotional impact way up the purchase funnel at brand awareness and brand consideration, smart advertisers and their agencies will use interactivity to enable a consumer to continue moving down the funnel right from that singular brand impression.

Imagine a world where a powerful emotional message delivered on behalf of an advertiser enabled the consumer to immediately drill deeper and learn more — right within the same ad unit, without leaving the page they are on.

Giving the consumer control — letting them explore, learn more about the product or service, watch a video, drill deeply into the product specs, or request a follow-up or an RFI — would be incredibly smart. It would extend the presence of a brand out beyond its website and take advantage of existing media spend. Yes — the creative budget would need to be higher, but that’s typically a smaller part of the overall budget to begin with. And combining the brand and DR media budgets and driving for impact is ultimately one of the great unmet challenges about which we’ve been claiming victory online for years already.

Problem 3

Sales and operational inefficiency

I wrote an article in May titled “How we screwed up online advertising.” In this article, I discussed a lot of important issues related to sales and operational inefficiency. Mostly I was talking about the premium online display world, but this problem is not limited just to hand-sold display inventory at the big publishers (although that segment of the market is the easiest to poke holes in).

We’ve promised granular control of media buys with immense amounts of optimization and accountability possible. But we designed the systems early in the life of the industry and locked the granular controls down in such a way that limits us to small media buys for small budgets. As we’ve tried to scale beyond this, it’s become clear that we need to focus on throughput and operational scale rather than granularity of control.

So let’s dig into the types of sales and operational inefficiencies that exist in this market, and we’ll break it down into a few different chunks:

Premium online display: media agencies. Media agencies have huge problems to overcome in the coming few years. Their margins have been compressed and negotiated into shambles. They are compensated mostly for the work they do, which is increasingly more tactical, and less for the value that they provide, which is significant.

This is an industry segment that significantly underinvested in its IT infrastructure at a time when other industries became very automated. And even the outside tools that media agencies bring in-house to help solve their other problems are antiquated and don’t interoperate with each other. Meanwhile the media marketplace has exploded into massive fragmentation — meaning that buyers need to do a lot more work just to execute on their campaigns.

Despite the widely held belief that traditional media is unaccountable and highly inefficient, I’ve heard from numerous large brand advertisers that online display is 8-10 times less efficient than traditional media from an advertiser’s perspective. This is because in traditional media, the up-front planning and buying costs are much lower — and there is no further work done once the campaign is delivered to the publisher until after it ends. In online display, more than two-thirds of the work takes place after the campaign is trafficked. And that’s just on the buy side.

Premium online display: publishers. While the agencies have been struggling with media fragmentation, the sales forces at the publishers have been running into problems because of it as well. Online premium media buyers are expected to engage with about twice as many publishers as their traditional media counterparts — but are expected to do so without the maturity of planning tools and resources that exist in that world. This leads to requests for proposals (RFPs) delivered to publishers that expect the salesperson to do most of the work done by a media buyer in traditional media.

Additionally, since we have such a strong split between brand and DR buys in premium display — the salespeople have a hard time nailing down their pitch — it’s hard to satisfy two customer sets that have radically different success metrics.

And finally, there is an operations nightmare that exists in premium display that is unlike anything seen in traditional media. I discussed above that two-thirds of the work on the buy side takes place once a campaign is trafficked to the publisher. Corresponding to this is an immense amount of ad operations work that is typically done to ensure that campaigns deliver properly on the sell side. This involves manually working around all the foibles of any of the existing publisher-facing ad servers, essentially understanding the quirks so that manual overrides can outsmart the controls in the system and ensure customer satisfaction.

Problem 3, cont.

Paid search and contextual: buyers. Much like we discussed above, paid search has focused on granular control to the exclusion of throughput. Since we’ve chosen an incredibly granular unit — the keyword — as the currency of paid search systems, we are forced to deal with the consequences of this granularity. Here’s a scenario that will drive this home:

Imagine yourself to be a mail-order flower retailer that tried to drive most of your sales through paid search and contextual ads. You could go out and buy every keyword related to flowers that you could imagine — every type of flower, every color of flower, every region you service combined with keywords for flowers, etc. Eventually you could easily end up with hundreds of thousands of keywords to manage.

This is essentially untenable to do manually, meaning that you’d need to go through an SEM agency to manage in a more automated fashion. And even with an automated system designed to optimize bidding on your selected keywords against a CPA, its highly likely that you’ll have missed many opportunities to reach a potential customer via paid search because you either missed the keyword they chose or because you missed showing them an ad due to competition — and couldn’t reach them on their next query.

Imagine a search advertising experience where you could express your goals (sell flowers to people who are likely to purchase them), where all the relevant keywords, as well as activities that flower buyers historically performed, were mapped against ad opportunities. And the right ads were generated automatically based on what products you had to offer, in such a way that was targeted to what that specific person was most likely to be interested in.

Paid search and contextual: sellers. Google has approached ads in search engine results pages (SERPs) in its own way, but that doesn’t mean it’s the only way — or even the best way. And despite the fact that Google was able to apply the demand it had pent up in its paid search marketplace against aggregated web page inventory — and use contextual targeting to do so — that doesn’t mean that those pages are necessarily monetized best by text ads.

There is no question about the value of reaching consumers with ads right at the moment that they raise their hands to identify themselves as potential customers. But there’s no reason that the ad you show them needs to be a block of text. And there’s no reason that the creative (as we discussed above) can’t be interactive and support multiple objectives right within the SERP.

While contextual targeting is quite a powerful way to ensure that an ad is reaching a relevant audience, so are most other methods of targeting — from geographically identifying someone as a local prospect, to recognizing an existing customer and showing them an ad that entices them to upgrade a product or service, to recognizing a prospect’s location within the purchase funnel and showing them an ad that moves them toward a purchase.

The idea that automated sales needs to be a real-time auction, or relegated to small (tail) advertisers and publishers — or that brand advertisers shouldn’t be focused on anything but paid clicks — is incredibly flawed. Advertisers that spend hundreds of millions or even billions of dollars annually on advertising are not going to flow large chunks of that budget into granularly managed keyword buys, or even into granularly managed, manually optimized impression buys on hundreds or thousands of publishers.

This all leads to…

Problem 4

Weak economics

According to eMarketer, U.S. average CPMs by media type in 2008 were as follows:

 

 Paid search  $75.33
 Broadcast TV  $10.25
 Syndication TV  $8.77
 Magazines  $6.98
 Cable TV  $5.99
 Newspapers  $5.50
 Radio  $4.50
 Online display  $2.46
 Outdoor  $2.26

 

Source: eMarketer, “How Much Ads Cost,” April 23, 2009

It’s generally understood that while people are spending about 30 percent of their media consumption time online, only about 10 percent of media budgets are dedicated to online. We know that paid search has great CPMs on average — but relatively low volume. But why are we seeing such low CPMs on the online display inventory? Is it simply a case of low CPMs being driven by too much supply?

The chart below is cobbled together from several disparate data sources, but uses them to show one simple concept: that from an impression volume perspective, most media types are in the same “order of magnitude.” Paid search has significantly lower volumes.

So given the CPMs we see above, and the fact that online display has a pretty high number of available impressions, we can imagine that there is a problem of supply and demand at work. But it’s not so much higher that we can only ascribe basic economics. This tells me that the other issues I’ve been describing are part of the problem.

If we can provide brand advertisers with creative formats that enable them to evoke an emotional response, if we can automate the sales and operations processes such that it’s easy to spend money online, and if we can provide significant value to brand advertisers as well as DR advertisers, we should see the CPM go up significantly in online display.

And this brings us to the conclusion — the whole point of this article. Advertisers are spending money to advertise in order to sell enough products or services at a profit to survive and thrive. If their products or services are high quality and valuable, they’ll succeed — but only if enough potential customers know that their products or services exist, and if they can become educated enough to understand what the value is. Publishers are creating their own set of products in the form of some type of content that they hope consumers will ingest. They also are advertisers, selling the value of their content to the consumer. And in order for them to make enough money to create more valuable content to attract consumers, they need to be able to profit off of the advertising that they sell.

Right now the world is living on somewhat inverted principles. Much of the advertising being sold is not profitable enough to cover the production costs of the content that “hosts” it at any significant profit margin. This means that the vehicles that carry the ads — the content — are at risk of disappearing. And this means that the means for a company to put its message of value in front of a potential customer is eroding. This is a death spiral — one that can’t continue. So let’s fix it, eh?

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