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The Evolution of Online Advertising

Apr 24, 2009
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Online advertising/marketing practices tend to evolve according to a very specific life-cycle. This pattern applies to markets in general (i.e. regions), verticals within those markets, and even particular products within those verticals. Understanding where on the evolutionary scale your target market lies is essential to managing a successful online marketing campaign. In fact, the recent fall in average CPMs can be partly chalked up to how publishers have failed evolve with the times and reinvent their revenue model.

Adapting Through Evolution

The online advertising life-cycle basically unfolds as advertisers and publishers amass information as the market matures. When either party fails to capitalize on new information and adapt their marketing practices to it, their conversions suffer. And depending on the market and/or vertical, evolution can mean either a new model displacing a previous one, or simply being added to the arsenal of online marketing methods.

In Phase 1, the market is new and uncertain, and marketing is geared toward branding and impressions-based advertising (CPM). Then in Phase 2, reliable sources of traffic emerge, and a desire for quantitative results causes cost-per-click (CPC) to replace CPM. Finally, in Phase 3, relationships develop between advertisers and publishers, and they focus on actually converting visitors through a cost-per-action (CPA) model.

Phase 1: First Impressions

attentionWhen a new market opens up (by region or product), relative uncertainty looms for two reason. First, the demand for a completely new product offer is still untested and, therefore, unknown. Secondly, everyone is a perfect stranger. Consumers don’t yet know the advertisers, and advertisers don’t yet know where their best acquisition channels lay.

Consequently, CPM emerges as the most viable marketing method. Advertisers need to introduce their branding into the marketplace, and while CPM lets them be certain of what they’re paying for (i.e. an eyeball), it allows publishers to promote an unfamiliar brand without any risks.

For instance, advertisers introduce their branding into the marketplace by purchasing a pre-determined number of eyeballs, and need not bother with more costly considerations such as fraud control. Similarly, publishers place a banner on their site that will render as many times as the pages load, and they need not worry about whether or not their traffic is targeted.

Phase 2: Cost per Click

buy_viagra_nowAs consumers become familiar with various brands and their products offers, and advertisers begin to carve out their own market share, CPMs lose their appeal. Advertisers have begun to establish a brand presence and begin to want quantitative results. Rather than paying for mere brand exposure, advertisers begin to focus on having consumers actually visit their site, and so CPC is introduced.

Similarly, publishers have also begun to understand the nature of their traffic (how to both generate and sustain it), and begin to feel confident of where they can refer it to. Consequently, a CPC model also begins to look appealing for them, because as long as they can sustain their traffic, they can monetize it by referring consumers on a per-visit basis. And as far as publishers are concerned, converting that consumer remains entirely the responsibility of the advertiser.

Phase 3: Converting Visitors

affiliate_marketingAs a market continues to mature, it becomes more competitive, and getting consumers onto a site is no longer sufficient. After all, these consumers already know where to shop, and they’re much less likely to make a purchase just because they’ve clicked through to an advertiser’s site. So advertisers start looking for publishers who can refer traffic that actually converts, and the CPA model is introduced into the market.

At this point, it is worth noting that certain advertisers and publishers have both established reputations with consumers, and relationships within their respective industries. While advertisers have determined which publishers have the most targeted traffic, publishers have determined which brands are most appealing to their audiences. Similarly, consumers have figured out which publishers have the most reliable content and active communities.

Across the board, the market has begun to stabilize, and all parties are beginning to understand where their best partners and biggest competition are. More importantly, they are starting to understand where they stand in the marketplace because the market is beginning to stabilize and take form.

Evolutionary Theory Applied

easystreetIn many ways, you can’t blame publishers for wanting to stick to CPMs. After all, it’s easy money. But what good is easy-street once it hits a dead-end? After all as AdAge recently reported, not only are average CPMs off 20%, but “the average CPMs on ad networks ranged from […] only 6% to 11% of the prices publishers could command when they sold inventory directly. And the pricing for networks appears to be getting worse not better.”

This is exactly why content networks such as b5media are having the trouble they are, and partly why newspaper revenues are expected to fall another 30%. Such organizations have pushed a strictly CPM revenue model when they should’ve started diversifying their ad revenue stream.

The evolution of online advertising does not always mean that one model complete supplants another model. Rather, oftentimes it means that a new model encroaches on the popularity of a previous one. Obviously, advertisers continue to have branding goals, so CPMs persist.

But once advertisers know the market and who has its attention, they also want quantifiable results. They want visitors and conversions, and this is why CPM-reliant publishers have to put their money where their mouth is. Their ad-sales force is telling advertisers they have targeted audiences, but they have to be willing to prove it, and insofar as they forego adopting new ad-revenue streams (i.e. adapting), they forego a huge share of the new, and ever-evolving ad-revenue market.

Filed under: Online Advertising + Online Marketing + Online Publishing
  • http://stigmare.com Steven Paul Matsumoto

    CT,

    This is a wonderful analysis of both the evolution of and challenges faced by both on and off line media. To me it simply reinforces the need on the part of both the agency and client to clearly define the scope of a campaign. As you stated, “The evolution of online advertising does not always mean that one model completely supplants another model.”

    Great Job,

    Steven Paul Matsumoto
    twitter.com/StevenMatsumoto

  • http://www.b5media.com Jeremy Wright

    I hadn’t realized we were having issues, at least when compared to our competitors (2000 of which have gone out of business in the last year). We’re still here, still growing, revenue is still stable, we continue to grow our comScore traffic and rank, we continue to have major clients who are incredibly happy to work with us…

    Oh, and we’ve always done CPA/CPC, so yeah…

    I get the point you were trying to make: networks that only do display in a down economy are being foolish at best… But that doesn’t apply to us, as a quick look at our media kit would have shown you.

    Either way, the core point of the article isn’t actually accurate. Publishers don’t go from CPM to CPC to CPA. They go from what works to what works better to what works best. For *some* audiences, strategies and companies this will eventually be CPA. But to claim that it’s the best way for everyone is, well, foolish at best.

  • http://www.gypsybandito.com CT Moore

    @Jeremy,
    My point about evolution was more about advertisers/retailers than actual publishers. Of course publishers go from what work to what works, but from an advertiser’s point of view, CPMs stops working because of banner blindness, CPC stops working because of fraud and conversions ratios, etc, etc…

    I guess what I was getting at is marketers (brands or the agencies that market them) will over time take their online campaigns from mere advertising to more conversion-centric marketing. This is why, I think, CPMs are falling: demand has fallen because many advertisers are in verticals where the branding goals of CPMs are obsolete, and now they have to focus on hard conversions.

  • http://www.b5media.com Jeremy Wright

    CT, thanks for clarifying. I’ll agree that for some marketers, the transition from CPM to CPA is a natural one. But that’s if the primary goal is to drive sales directly from the campaign. And we both know it isn’t.

    I think what you might be seeing is purely economic shifts where shrinking budgets drop the branding side in favour of conversion. But smart marketers know that marketing goes beyond Direct Marketing, to brand awareness.

    Not that CPMs are the answer. They aren’t. But if you’re launching a new airline, CPA isn’t the right approach, clearly.

    But for value-conscious marketers? Definitely.

    That said, every publisher should no longer be saying “what are you looking to spend?”, but “how can we help you meet your goals?”. If a company’s goal *is* branding, CPA isn’t appropriate. However for certain campaigns, banners and CPM might just be the right thing.

    Maybe we should do a podcast on this, lol.

  • gian fulgoni

    I agree with Jeremy. I don’t think there’s an evolution going on here. It’s simply the economic reality that when times get tough investments in branding advertising always decline in favor of direct response advertising and the need to get the immediate sale. But to claim that this is an evolution means that one believes that we’ll not see a return to branding advertising when the economy recovers. That’s akin to saying that building brands is a thing of the past — which is simply not the case.

  • http://www.shareresults.com CT Moore

    @gian,
    As I said in the article:

    [...] depending on the market and/or vertical, evolution can mean either a new model displacing a previous one, or simply being added to the arsenal of online marketing methods

    .

    What I’m getting at, then, is that the slew of publishers struggling with falling CPMs should consider other models (as b5media does, as Jeremy pointed out). Something else I pointed out in the post:

    Obviously, advertisers continue to have branding goals, so CPMs persist. [...] But once advertisers know the market and who has its attention, they also want quantifiable results.

    My point is that falling CPMs can only partly be chalked up to the economy. They started falling before the credit crisis brought the sky falling down on us, and that’s partly because many advertisers in many verticals realize that they could do more with or get more out of their online advertising.

  • http://www.b5media.com Jeremy Wright

    CT, sorry, but your last sentence requires backing. Ad rates weren’t falling before the bad economy. They were going up (for CPM ads). The economy took out finance, auto, travel and all luxury ad spending, and made a major dent in many supporting industries such as insurance.

    Not to say that there isn’t a transition, but to claim it’s a larger trend than the current financial situation requires proof :)

  • http://www.shareresults.com CT Moore

    Okay, Jeremy, you kinda got me. Not being a financial observer by any stretch, I overlooked qualifying that statement. I was really only looking at when things got really hair around Q2/Q3 2008, and if I recall correctly, CPMs have been dropping since before that.

    Of course, the economy has been in rough shape since about 2002, and it’s been taking a beating since as far back as 2007, so yeah, you’re completely right about CPMs were still going up while the economy was sliding.

    But the point of this post wasn’t to draw a link between the economy and the evolution of onlien marketing methods. Rather, it was to say:

    Hey, these two things are coinciding by, well, coincidence, so maybe publishers (like newspapers) should start looking at options other CPMs.

    As far as the link between CPMs and the economy goes, I think that having the sky fall on our heads over the last six months has exacerbated a decline in CPMs that otherwise would’ve been much gentler, and given more publishers more time to adapt.

    So all I’m really saying is:
    1) Stuff evolves,
    2) But that doesn’t mean new and old species can’t co-exist,
    3) Part of the problem publishers are having is that many of them are relying on one stream of revenues (CPMs)
    4) That the economy has just so happened to collapse now has made it a really bad time to do that,
    5) So those that wanna stay afloat might consider looking at a more multi-tiered revenue stream that allows them to build more nuanced relationships with advertisers.