I always laugh when reading media reports of announcements by analysts. In the sensationalism-driven market that is today’s journalism, lots of superlatives are used as if some numbers cruncher at J.P. Morgan is the modern day Nostradamus.

One such analyst last week lowered his prediction for the growth of online advertising spend. Imran Khan adjusted his prediction of online display advertising in 2008 and 2009 saying the overall economic downturn will have a trickle-down effect. His 2008 estimate for the online display market is now $8.2 billion, down from $8.6 billion. He expects 27 percent annual growth in the U.S. ad market now, down from a 32 percent projection earlier this year.

And the reaction from the media, both in the Associated Press story and elsewhere, has been Doomsday-esque.

Relax. He’s lowering the growth projection, not saying the market will go south. You’ll have to wait another couple months before buying the beach condo in Boca. I’m not the only one who sees through the spin.

TechCrunch says total online ad spend was down 2.4 percent in Q2 of this year compared to last, the first-ever decline in digital spend from year to year. But the Wall Street Journal says online advertising rose 20% in the second quarter of 2008.

Everyone interprets the numbers differently. The simple explanation of it all is that growth and spend is slowing because the economy is slowing. Should the economy rebound, the numbers will as well.

But that doesn’t necessarily mean the online advertising world isn’t crumbling.

Another thing Khan said in his new projections intrigued me. He indicated search ad spends will fare better than display because of advertiser’s preference for, “performance-based advertising.” The WSJ article said advertisers think the safest way to reach the online consumer is through the plain text offerings of search engine pay-per click ads.

Now, I’m not an analyst, per se. But I do work at an advertising agency and I do work with clients who buy ads. My firm makes recommendations to them on what they should purchase and what they shouldn’t. Thankfully, we have expert media buyers and planners that make those recommendations because I think online advertising is broken and these hidden hints begin to reveal why.

Average click-through rates on Internet banner advertising as of mid-2007 were 0.2% according to Eyeblaster. A quick poll of the pay-per-click marketers who follow me on Twitter resulted in paid search ad click-through rates varying between two and 25 percent, depending upon the industry, craft of the ad copy and so forth.

But these are just clicks — opt-ins to see your content. There remains severe drop off from click to engagement and even more from engagement to conversion, depending upon what your conversion might be (sign-up, address capture, sale, etc.). Advertisers are much more interested in performance-based executions because if the money they’re spending isn’t driving revenue, they lose their jobs. Sure, the engagement and conversion portion after click-through is the responsibility of the advertiser, not the media property, but display ads often are, account for much more of the total spend and simple pay-per-click isn’t going to be enough moving forward.

We have to come up with something better.

By we, I mean some combination of advertising professionals, marketers and media outlets. Whomever cracks the code first will have a leg up on redefining an entire industry. What’s intriguing is that the answer is going to be a blend of advertising, content and engagement which makes me think social media thinking will have something to do with it.

No, I don’t have the answer, but certainly hope I’m a part of discovering it.

While the new advertising model hasn’t yet been discovered, there are at least two companies I’ve found that are walking down unique paths. One is pushing a video advertising solution that seems to get closer to a better payoff than what others are doing. The other is an enterprise-level platform and social networking solution whose business approach is shockingly refreshing. While neither has nailed the solution, the thinking is surfacing that indicates an answer could be on the horizon.

VideoEgg takes cost per click a step further with its video-serving solution by selling a cost-per-engagement model. All the banner ads, impression and so-forth are free. The advertiser is only billed when the user clicks to watch the video. The guarantee is that the primary content is being consumed by an interested party (it’s not built on an auto-play model) and thus the advertiser is getting more performance for their dollar.

India-based Pinstorm bills itself as a pure, pay-for-performance digital advertising firm. Their model is refreshing and mind-boggling cool. They design it, create it, build it, manage it and more (with the client being as involved or not involved in any of those steps as they prefer) and the client only pays for the performance metrics they determine to be important. So, if your bank wanted to build a social network based on financial services and the important metric to you was number of “expert” inquiries made by users, Pinstorm would build and manage the community and own the responsibility of driving those inquiries. You only pay them when the inquiries occur. Certainly, the cost per action will be much higher than a click on a search ad, but still … you define the performance metric and only pay when you get it.

I don’t argue with the growth projections from J.P. Morgan, Forrester or anyone else for that matter. Analysts and researchers are much more qualified to make those predictions than I. But I do think 26 percent growth is unlikely if the advertising model online doesn’t change to better accommodate advertiser’s performance expectations.

The silver lining, and often overlooked outcome, of this trend toward better advertising, is that better performing ads, by definition, give we, the consumers, a better media experience. The only question remaining is who will figure out how to provide it?

What do you think can make online advertising more successful? The comments are yours.

Note: Image from Tombstone Generator (Click here to make yours.)

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About Jason Falls

Jason Falls

Jason Falls is the founder and chief instigator for Social Media Explorer's blog. He is a leading thinker, speaker and strategist in the world of digital marketing and is co-author of two books, No Bullshit Social Media: The All-Business, No-Hype Guide To Social Media Marketing and The Rebel's Guide To Email Marketing. By day, he leads digital strategy for CafePress, one of the world's largest online retailers. His opinions are his, not necessarily theirs. Follow him on Twitter (@JasonFalls).

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Comments Policy

Comments on Social Media Explorer are open to anyone. However, I will remove any comment that is disrespectful and not in the spirit of intelligent discourse. You are welcome to leave links to content relevant to the conversation, but I reserve the right to remove it if I don't see the relevancy. Be nice, have fun. Fair?

  • http://www.sinotechblog.com sinotechian

    Jason,

    Liked your post but wanted to express my surprise at the click through rates you said your twitter followers stated were normal. In terms of click-through you are indeed correct it depends on position, creative, format, surrounding content etc…. however with all these factors set at most desirable I would be extremely surprised to get a CTR above 5-7% (on a content network most networks would support the <1% CTR). In a search context, 3-5% is normal. I am working in Asia where I believe we see similar CTR's to that of north America and Europe.

    Any other comments about CTR's… I am interested in know if others support my claims :)

    Regards
    Matt

    • http://socialmediaexplorer.com JasonFalls

      Thanks Matt. I think the CTR in some niche industries can get pretty high (15-20%) but I also think the pay-per-click artists who responded may believe their own bullshit and estimate their numbers a little on the high end. I don't have reason to doubt them, other than folks like you who throw out 5-7 is good. I've always thought if you're getting around 5%, you shouldn't complain too much. Still, I think advertisers will continue to expect more and 5% won't cut it much longer. We've got to come up with a better system.

      Thanks for the comments.

  • http://www.convinceandconvert.com/convince-convert-digital-marketing-blog jasonbaer

    Jason I agree with the ridiculousness of the “sky is falling” predictions. ALL other media would be delighted to have a 5% growth rate, much less 20%+.

    Where I don't agree with you is the notion that online advertising doesn't work or is in decline. The trap you are falling into is the idea that all online ads must generate immediately measurable clicks and conversions. While the Web has enabled unbelievable advances in direct marketing and measured response due to its inherent trackability, the growth of the online ad channel will not ultimately be in that area.

    Instead, companies like Pointroll, Eyeblaster, VideoEgg, et al will enable brands and their agencies to increasingly communicate in an effective and engaging way with consumers via hyper-targeted rich media ad executions. Many (most?) of these ads will be for brands that are not purchasable per se online. CPG, Auto, Financial, etc.

    Once the Web can have brand impact (and many studies by the IAB show that it can) that nears that of TV, the floodgates will open, and advertisers will take more and more dollars from broadcast and move them online. Online is less expensive, more targetable, and more trackable (even for offline products).

    Consequently, the competition for online ad dollars isn't direct mail or other DM vehicles – it's TV. As such, I believe the industry is pursuing the right path, and major changes will neither be necessary, nor realized with the exception of more branded content and sponsorships rather than banners.

    Over the shorter term, digital marketing of all types (including search) will continue to steal market share from other tactics, due to the conversion optimization elements you describe. I have a post about that:

    “5 Reasons Why Digital Marketing Will Thrive in a Recession”
    http://is.gd/1nkr

    All the best,

    Jason Baer
    Convince & Convert – Training agencies on digital marketing
    http://www.convinceandconvert.com/convince-conv

    • http://socialmediaexplorer.com JasonFalls

      Thanks Jason. As you probably know, I enjoy it most when commentors challenge me on points. I would agree with several of your points and think online advertising is, in many ways, the future of advertising because it's more targetable, trackable and less expensive. But I do think that something is going to have to change the model before we can successfully expect that. While the numbers won't indicate it now, the on-the-street sensibility I've shared in the post is that advertisers are going to begin demanding better performance, better ROI because of those factors of targetability and trackability. As a result, 5% or less isn't going to cut it soon. If we don't push pay-per-engagement or pay-per-performance thinking, we as agencies or media outlets will never be able to deliver numbers they'll demand.

      Bottom line – 5% return is pitiful. We can do better. And we should.

      • http://www.convinceandconvert.com/convince-convert-digital-marketing-blog jasonbaer

        Absolutely we want to do better than 5%. But increasingly, as the Web matures, advertisers juxtapose it with other media outlets. And to suggest that TV, radio, print, direct mail, and outdoor routinely do better than 5% is just wrong. We should absolutely strive to do better, but the truth is that online – while certainly flawed – is already performing much better than traditional in many cases.

        In fact, I just put up a post on Friday about Kellogg stating that online is producing better ROI than traditional for cereal – not a category that leaps to mind when you think about typical online advertisers.

        • IDAMan

          You both are missing a key point…a key point that we in the “rich media” business tend to overlook.

          The point that we should all focus on is that not every ad is designed to have the intended action be a click. Some ads are designed to have users watch a video or play a game. Other ads allow users to purchase items right from within the banner. Still other ads allow users to upload and share UGC.

          At the end of the day, those who continue to measure success of campaigns strictly on the CTR will ultimately fail to do well for their clients and their brands.

          • http://socialmediaexplorer.com JasonFalls

            Agreed, but you prove the point with your response – the metric has to change. Even if your ad's purpose is watching or playing a game, or buying something right from the ad, you're providing a level of engagement that most ads don't. Still, there's not enough proof in even those ideas, which deliver engagement but don't deliver well on engagement with the brand, that the rate of participation is worth the effort.

            Online advertising has to change fundamentally as advertisers wise up and realize the consumer demands a higher degree of something — engagement, humor, interest, curiosity — from advertising in order for them to be effective.

            Thanks for the perspective.

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  • bbowenjr

    Great article Jason, it will be interesting to watch these new performance models evolve. We are putting our eggs in http://www.Boomja.com – enabling subject experts to create deep comprehensive vertical search directories to help channel targeted audiences to information and advertisers. It's a great first step to building more qualified communities of prospects.

    Buff Bowen
    http://www.Boomja.com

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  • http://www.networkmarketingsuccess.ws mlgreen8753

    VideoEgg sounds similar to what other video ad networks are doing and I don't see a unique selling point that's going to give it an edge over the competition. Adwido, on the other hand, offers a free package setting itself apart from the other video advertising networks.

  • http://www.brisbanehousepainter.net/ brisbane house painters

    Interesting, first thing I have seen about a pull back in spending. I would be willing to bet the majority of the cut back are coming from major companies who are cutting costs, regardless of performance, to appease shareholders.

  • http://www.brisbanehousepainter.net/ brisbane house painters

    Interesting, first thing I have seen about a pull back in spending. I would be willing to bet the majority of the cut back are coming from major companies who are cutting costs, regardless of performance, to appease shareholders.