Reinvent Ads for Maximum Impact

There’s something ironic about how much ad spending e-commerce players do offline on TV, radio and billboards. If the Web is such a potentially profitable place to set up shop, why isn’t it also a great place to advertise?

A top-20 online retailer I spoke with recently said it doesn’t do online advertising anymore — all its online spending is now pay-for-performance deals. The company tried banners at portals, banners at vertical content sites and banners in ad networks. Every time it analyzed the results, the numbers didn’t work. The click-through rates tended to be below 1 percent and the conversion rate on those clicks was not much higher. Even ad buys at low CPMs typically resulted in customer-acquisition costs above $100.

I polled a few more online merchants from booksellers to pet suppliers to drugstores, and heard the same story. Every one had moved its online marketing beyond the banner to a mixture of portal tenancies, affiliate programs, direct e-mail and one-off business development deals.

It is this trend that underlies the projection by Forrester Research, Cambridge, MA, that 50 percent of all online advertising spending will be performance-based within three years. That should serve as a wake-up call to everyone in the online advertising business.

I predict a radical evolution in online advertising, driven by the explosive growth of e-commerce. What are the specific forces that will shape that evolution? My conversations with online retailers reveal four fundamental needs not met by today’s banner ads. They are:

* A format that puts products in the spotlight. Retailers have been experimenting lately with new, product-centric ad formats, taller than a banner ad, or perhaps even vertical. With such layouts, they can put into an ad the one thing that drives click-through rates well above 1 percent: a nice picture of a specific product. The traditional ad banner is too short for spotlighting products.

* Contextual product placement. The Web is the most fragmented medium ever to emerge. Although a handful of portals take the lion’s share of ad dollars, within three years the majority of ad spending will have moved away from portals to thousands of smaller vertical-content sites, according to Forrester. The rise of such sites has propelled the growth of DoubleClick and Flycast.

This should be good news for retailers. If they can put the right product-specific ads into the context of the narrowcast vertical content, they can boost click-through rates well above 2 percent. When you are at a site about high fashion, you ought to see ads for fashion and beauty products, not ads loosely targeted to the category of “women.” Ad networks must become like databases, able to intelligently connect thousands of sites with the right set of products from hundreds or thousands of retailers.

* Closed-loop tracking, from impression, to click, to purchase. Online retailers have been in a land grab for customers. This is sure to continue for a few more years, but at the same time pressure will mount to lower customer acquisition costs. Already, we see retailers feeling a chill wind depressing their stocks, largely over the question of whether they can bring acquisition costs below the lifetime value of those customers.

As a result, retailers are demanding to be able to measure ROI for their advertising. And the true measure of ROI for a retailer is not how many people click on an ad, but how many go on to make a purchase. Closed-loop tracking will become the norm, not something only for special campaigns.

* True pay for performance. Retailers say no to banners for two reasons. The first is that they are not terribly effective at selling product, and are therefore expensive. The second is that they typically are priced on a CPM basis. That makes them very risky. With so much at stake in the category wars, gambling on CPM deals makes no sense. Somehow, online advertising needs to accommodate retailers’ need to get results from all of their marketing dollars. Advertising is no longer about impressions; it’s about selling products.

Such are the forces that will shape the evolution of online advertising – and that will determine the future of the ad banner. Will the media format that gave rise to the online advertising industry evolve to survive in these new conditions, or will something new emerge from another source?

The dawning of the age of e-commerce presents an enormous opportunity to

the existing ad networks and major portals — as well as to new entrants into the market.

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