The Coming Great Internet Advertising Shakeout

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Branding vs. direct response is the big debate in the world of Internet advertising today, i.e. cost per thousand (banner impressions) vs. cost per action (click-throughs, responses, sales, etc.).


The online advertising industry is, for the most part, based on traditional advertising models; after all, that's what most of the early online marketers had as a model. Thus, avenues such as banner advertising will usually run between $10 and $50 CPM (cost per thousand impressions, or ad viewings) or, on a supposed "DM model," between $1 and $5 CPC (cost per click-through to the advertiser's Web site).


More targeted ad buys on more heavily-trafficked Web sites can easily add up to a lot more bucks. But where's the bang for those bucks?


Let's say the average CTR (click-through rate) on banner ads is 2 percent (I say it isn't, but that's another debate.) If I'm a purveyor of, say, videos that sell for $19.98 each, and I do a banner ad campaign of 100 million impressions that results in a 1.2 percent response rate from actual visitors (2 million of them in this scenario), then I'm going to garner about 24,000 orders. If my allowable is around $6.25 per order, then it doesn't take a rocket scientist to figure out that the most I can afford to pay for banner advertising is about $1.50 per thousand impressions.


One dollar and fifty cents CPM? Most Web site publishers would choke on their cappuccinos if you asked them to buy at that rate. "It simply isn't done!" they'd sputter. "We can't recover our publishing costs if we sell below rate cards!"


Balderdash. It's been well reported that more than half of all banner ad inventory goes unsold (some sources say as much as 75 percent). The top-name sites that gobble up most of the online advertising dollars are setting the standard by artificially inflating the ad costs; if we keep having "market corrections" like we have recently, shareholders in a lot of these companies are going to start demanding to see positive revenue streams.


So what does this all mean?


It means that very soon the direct marketers, who are already in the process of taking over online advertising, are going to drive those traditional advertising models into the sea of forgetfulness (and drive those prices down to $1 CPM and $0.01 CPC).


Good old supply-and-demand economics will inevitably drive Web site publishers kicking and screaming to a DM-based pricing model for online advertising. Sure, they can sell off their inventory to big-name spenders that are more interested in branding than getting an immediate return on investment. But for the other 75 percent that goes unsold, it's time to face reality: They need to sell it for whatever they can get. And the DMers are right there ready to buy it.


Television's been doing it for years -- Frito-Lay can buy 60 seconds for a million dollars during the Super Bowl, but keep your set on another few hours and there's a 2 a.m. half-hour infomercial marketing original "Honeymooners" episodes that cost the advertiser a few hundred bucks. Heck, he might have even bought per-inquiry advertising on your cable TV for a percentage of sales.


For the record, I'm aware that many old-school DMers prefer buying on a CPM basis because CPI (cost per inquiry) doesn't allow them to "optimize" their buys -- and that's all well and good. But I'm talking about something much more revolutionary here than the already stale CPM/CPA argument -- and, in my opinion, when it comes it will be a win-win-win-win situation.


Publishers will be happy because they've sold their entire inventory and finally have positive cash flow to show for it. Their shareholders -- stock or otherwise -- will be happy, because they won't have to keep screaming, "Show me the money!" Advertisers will be happy because they're actually getting a solid return on investment in their Internet marketing efforts (for a change).


And agencies will be happy because they've made everybody else happy and pocketed a nice commission to boot. (Don't believe me? Show me unsold inventory at $1 CPM with a guarantee of 2 percent CTR and I'll give you clients that'll buy 5 million impressions a week. They're out there.)


It's coming, folks. Internet advertising models will soon transform before your very eyes, and whether you're talking CPM, CPC, CPA, CPI or whatever, if it doesn't result in ROI, it'll be DOA.


William Greene is moderator of the Direct Marketing Online discussion list (http://www.directmarketing-online.com/) and director of Internet marketing at direct marketing agency Grizzard in Atlanta.
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