To Target or Not to Target?

The Internet advertising world is buzzing about the power of targeting. Analysts and the media have championed targeting as the “magic bullet” that will increase cost-per-thousand-impression (CPM) rates for Web sites and ultimately accelerate the growth of Web advertising.

But what seems to be missing from the dialogue is the answer to this basic question: Does targeting specific groups of people through Web advertising net a better return on investment (ROI) than advertising without targeting?

Market forces prevail: Despite the hype, few marketers have examined whether and when targeting actually makes economic sense. After all, isn't the whole point of advertising on the Web to help the advertiser make money? And if we collectively can help advertisers achieve their goals, then isn't that going to increase the viability and growth of the Internet advertising industry?

As online marketers become more sophisticated and big-name advertisers continue to learn that the Internet is a powerful marketing channel, it is inevitable that the remorseless economics of traditional advertising will prevail. Advertisers will become less interested in the technological nuances of the Web and will focus instead on whether it is helping them achieve their objectives or not.

The Web publishers, advertising and direct marketing agencies, ad networks and ad technology vendors that best meet the needs of advertisers will be the big winners. Those that do not focus on helping advertisers reach their goals — be it driving traffic to a Web site or creating a corporate brand — will be lost in the shuffle.

Return on investment is the key: This brings us to that ever-present buzzword — targeting. There is no denying that targeting in advertising is a valuable and powerful means of reaching prospective customers. Because of the inherent technical capabilities of the Internet, the possibilities for targeting are vast. For example, delivering a Ford Taurus ad to a consumer at the precise time he is shopping for a car (or searching for information about buying a car) is quite compelling.

But step back for a moment and consider what we at Flycast call the “Rule of Ratios.” It basically states that any increase in the cost of buying ads should be offset by an increase in the results. For example, if a $5 CPM buy nets a one-percent response and the CPM is then bumped to $25, a five-percent response is needed in order to maintain the ROI (1/5 = 5/25).

If the advertiser shifts to a $25 CPM campaign and, due to better targeting, triples response, then the advertiser's ROI goes down even though the response rate has improved. Here is the math:

* $25 spent on a $5 CPM campaign with a one-percent response yields 5,000 impressions and 50 responses: Cost per response = 50 cents.

* $25 spent on a $25 CPM campaign with a three-percent response yields 1,000 impressions and 30 responses: Cost per response = 83 cents.

In some cases, the additional 33-cents per response is the “brand premium” that the advertiser pays for appearing on the more targeted, more expensive site. While there may be a good reason for the advertiser to pay this premium, it is clear that the targeting available on the $25 site is not justified on a response basis.

In other cases, the additional cost per response simply represents a negative return on the investment in targeting.

Start small and experiment: The Web is the ultimate “test-before-you-invest” medium. Spending a small portion of your budget to test different creative concepts and targeting options is a cheap, fast and easy way to tailor a campaign and ultimately maximize results.

For example, let's say you have several different targeting options and are uncertain which one will perform better. The Internet allows advertisers to experiment with small amounts of money and minimize risk. So, spending a few thousand dollars on each option and examining which one nets better results would significantly increase the chances of having a successful campaign.

In many cases, it doesn't make sense to begin a campaign in a high CPM environment and then sit back and hope your ads do well. It is far more cost effective to start off advertising on smaller sites at lower CPMs and begin the testing and learning process. As the campaign evolves, you may find that specific sites (and parts of sites) are getting a better response than others. Likewise, you may want to take advantage of targeting options using the knowledge you have gained from testing. That is the time to enhance your targeting and focus on where you now know your customers are.

So … keep an eye on the numbers: Because technology allows advertisers to easily tweak campaigns on the fly, each campaign can be optimized to net the best possible return. Marketers must try promising new targeting methods and technologies. But ultimately, any investment for additional targeting must pay corresponding dividends.

Larry Braitman is vice president of business development and co-founder of Flycast Communications Corp., San Francisco, which offers advertising on a network of 500 Web sites.

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