Declining Online Advertising ROI

Anyone in ecommerce – particularly those selling third party brands or running marketplaces – know the important of online advertising. Without Google Adwords or Facebook Ads, many remaining pure-play ecommerce websites would be doomed. And offline counterparts would struggle growing their online business. But ad placement has become extremely automate these days and it’s destroying any kind of ROI from online advertising. So as a online merchant, do you increase online ad spend or focus on ‘organic’ customer acquisition? (or dare I say it, offline advertising!?)

Below are five companies who provide some details about their online advertising budget: Ebay, Amazon, TripAdvisor, Expedia and Priceline. Combined, they have spent over $10 billion on online marketing in FY2015, mainly on digital ads. Their ROI of online advertising is declining: businesses need to spend more for every additional dollar of sale.

Change in advertising and sales, from 2010 to 2015 (source: SEC 10-K filings)

online ad 2

Since 2010, their online ad spending outgrew their online B2C sales. This is a general trend in e-commerce: Google’s revenues are up 156% from 2010 to 2015, while online B2C sales roughly doubled. This is clearly not sustainable.

Now one might say online advertising (and advertising in general) can always be improved. However, the marketing departments of these huge online businesses are already well versed in online ads, true insiders to the market, and even their advertising efficiency is declining. One can only imagine the dreadful returns for outsiders, companies like Verizon or Walmart. Very few companies are transparent in their ad spending, so it’s impossible to really know what’s going on in their marketing departments.

The decline in bang for every ad dollar spent is proof that the expansion of online advertising is being done to the detriment of customers, in ever less productive campaigns.

Automation

The growth of ad exchanges, demand-side platforms, and programmatic buying has removed much of the need of human intervention in the process. User tracking enables advertisers to identify in real-time who is visiting any given website, and to match the visitor with an ad, instead of relying on the website’s content to draw an approximate profile of who might be viewing the webpage.

Automation has brought down the cost of deciding whether it’s worthwhile to place an ad, and user tracking has made websites’ content less relevant. It has become economical to place ads on low-end websites for cheap, because the marginal cost of placing an ad has become so low.
This means that the growth of online advertising has happened on subprime ad space. The industry’s argument is that it’s still worth their customers money, thanks to algorithms that check everything about the user, his browsing history, the cookies on his browser, his hardware data. This is a compelling case, because the prime as space on the Internet (websites such as The Economist, the New York Times) are very expensive. However, customers paying for their ads to be displayed have practically no way of making sure their ads are being displayed to the right people.
Brand

Moreover, the industry has been pushing for more advertising budgets to be allocated to “display ads”, particularly on mobile, where Internet users click on ads much less than on desktops. The huge red flag with this practice is that customers have no means of knowing if their ad dollars are being spent efficiently. With pay-per-click, at least someone is coming to their website. With display ads, they are merely paying for exposure and such vague concepts as “brand awareness”.

It’s not even clear if a visitor actually sees a “display” ad, and the industry is trying to set up a “viewability” standard for this type of ads. Currently, it is assumed that an ad has had a “reasonable chance of having been viewed by the visitor, if at least 50% of its pixels were displayed on the visitor’s browser for at least one continuous second”. This definition alone lets you understand how murky this type of advertising actually is.

“Display” caught up with pay-per-click in 2015, and is projected to reach $32.2 billion in the US in 2016, vs $29.3 billion for PPC. But the bigger question is, has time caught up with online advertising as a whole? And if so, as a merchant, what do we do about it? Is brand the solution and future of marketing period? Share your thoughts in the comments.

B2W