In 2020, online advertising is neither new nor under-analyzed, and yet there remains a fundamental misunderstanding about the role it plays, explains Grace Kite.
Businesses think that all digital advertising belongs in the same bucket as TV or posters, so they pay it out of their marketing budget, monitor its ROI, and increase it at the expense of other channels.
This makes sense for some types of online ads, but others don’t look like traditional advertising. Their job is not to stimulate demand. Instead, as a recent article in The Economist underlined, they are “the new rent”. Now that e-commerce is so prevalent, fewer businesses need to maintain a physical presence with a street store, but they need to maintain a virtual presence and that’s why they buy these ads.
Their goal is to help people who are already on their way to a business arrive safely. They replace the sign above the storefront, the lights that stay on inside, the shelving and even the inscription in the yellow pages.
Data shows digital ads aren’t driving new sales
My job is to estimate econometric models of individual business sales, and these models often show that certain types of digital marketing do not generate additional sales. Econometrics is not a perfect analytical technique, but ours conforms to IPA pricing standards every time, and we believe in the conclusion: economics and advertising on traditional channels.
Macro data indicates that digital ads also look like rent. It shows that the rise and rise of digital advertising matches the rise and rise of e-commerce. The correlation is not causation, but it surely is not a coincidence that the line of the graph below, the numerical share of spending, points to the northeast in parallel with bars, the share of trade. online retail.
And then there is the proof that The Economist used – the reaction to this year’s recession. Based on US data, he reports that traditional ad formats are on the decline, but online advertising is flat, if not slightly up. This is because “online retailers must maintain a visible presence, recession or not”.
Search is the obvious example, but it’s not the only rental-like digital ‘ad’
Byron Sharp puts forward search engine marketing as the archetypal example of digital rental advertising, or to use its terminology, advertising that really is “physical availability”.
The way Google handles search ad sales proves its point. Advertisers pay Google for clicks, and any hypothetical search ad that aims to tell a story, convince, or create demand might not convert immediately. Insiders report that this type of search ad is explicitly not supported in Google’s auction algorithm.
That’s not to say that all search engine marketing is rent-type, as Faris Yakob pointed out when I contacted him. For relatively unknown brands or existing brands launching a new product, research can increase awareness and, from there, new sales both now and in the future.
But that doesn’t mean search is the only example of rental-style digital advertising, either. Online video or programmatic display ads are also often used to guide prospects to the final sale. People don’t react to these ads because they are particularly compelling, but rather because they present a convenient way to checkout.
Affiliates are another competitor. Their cost is often allocated to advertising and paid for out of the marketing budget, but they are much more like a storefront that stores your product. As James Hankins put it in a recent Blog: “What is the difference between them and Tesco?
Rent type ads should not be paid from the marketing budget, they are operational
Correcting this misconception about search and other annuity-type digital advertising has three important implications.
The first and most important for CMOs is that this is an expense that shouldn’t come from the marketing budget. If some digital advertising is simply a cost of existence in online sales channels, the expense should come from the same budget that pays for the website and the building that houses the call center.
In 2019, 49% of marketing budgets were spent online. If even half of that spending was on rental ads, it would likely have strained the ability of marketing managers to create demand using the ad. This is a possible explanation for the recent API discovery that efficiency decreased in the award nominations. Advertisers may be forced to allocate too much budget to activities that do not generate additional sales.
The second implication is that there are better skills to manage these announcements elsewhere in the organization. What would an expert in sales channel management or merchandising do? Maybe they would cut spending on these ads to the level they used to spend with the yellow pages, or to the reasonable amount for signage. A CMO would be well advised to head straight down the hall to ask them.
And, finally, the analytics used by digital marketers need an overhaul. At this time, they don’t separate rent-type ads from demand-boosting ads. They count everyone who walks past the sign above the door and state that whatever they buy is driven by the sign. The challenge now is to move to a better system where analytics first identify which listings are similar to rental and which are demand drivers, and then stop reporting ROI for similar listings.
Perhaps then we could be sure whether or not we are paying too much rent.