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.


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.

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.

Need to Sell Online? Try Facebook

Believe it or not, when you have an all powerful platform with millions of users (and billions in this case) you think you can do anything. Like Windows in the 90’s, Facebook is the platform of the moment and now they’re extending it further – this time into shopping. In their own words:

Marketers are challenged to reach their customers and drive sales on mobile. The majority of time spent on mobile is in apps, and people spend the majority of that time in just a handful of apps, including Facebook and Instagram.1 For people, the mobile shopping experience is often difficult to navigate. Customers can experience slow load times and too many steps on the way to checkout. This is bad for people and bad for marketers.

I would suggest this is something that actually they’ve been looking at for a while. Remember beacon? That ill-fated attempt to mix social and commerce? This is perhaps the second attempt and it’s probably a much better route i.e instead of mixing content and commerce, they’re essentially creating a marketplace like Amazon, eBay and so-on. So this should work; the question is, as a merchant should you use it?

Today we have two main platforms in the western ecommerce world; eBay and Amazon. Alibaba if you’re an Asia merchant. Those three have stood alone despite the rise of Pinterest, Wanelo etc that promise coveted direct traffic to your store and products. With Facebook, the question in my mind is; who owns the customer? If FB directs customers to your store this new initiative is in effect an advertising play. Intriguingly though, they tease more:

Over time we’ll explore incorporating additional content into this experience, such as items listed for sale in Facebook Groups.

This suggests they want to catalog inventory and act as a storefront themselves. Facebook could perhaps be the world’s largest store should they want it given the 1.3 billion plus people on the platform. Do they want that though?

Shop on Google

According to the WSJ, Google is taking the final step to becoming an online marketplace of sorts. The Journal says:

The buttons will accompany sponsored—or paid—search results, often displayed under a “Shop on Google” heading at the top of the page. Buttons won’t appear with the nonsponsored results that are driven by Google’s basic search algorithm.

This is big news and potentially at odds with the company’s long-standing position of being the ‘gateway’ as opposed to the ‘destination’. So why is Google doing this; the answer is very obvious yet often overlooked. Despite Google’s top keywords being ‘service’ related terms e.g. Lawyer, Doctor etc as shown by this excellent WordStream infographic, it’s physical goods commerce that helps drive revenue.

To demonstrate, AdAge listed Google’s largest advertisers and highlighted in bold are retailers:

Rank Advertiser Ad Spending
1 Amazon $157.7
2 Priceline Group $82.3
3 AT&T $81.9
4 Expedia $71.6
5 Microsoft Corp. $67.1
6 Experian $61.7
7 Walmart Stores $59.7
8 Sears Holdings Corp. $59.2
9 IAC $53.9
10 Apollo Education Group University of Phoenix $53.5
11 Bankrate $51.9
12 Fiat Chrysler Automobiles $47.5
13 Berkshire Hathaway $45.7
14 Comcast Corp. $45.2
15 Home Depot $40.2
16 Blucora $39.1
17 Verizon Communications $38.4
18 Best Buy $38.0
19 Yahoo $36.2
20 Target Corp. $35.8
21 Bank of America Corp. $35.8
22 General Motors Co. $35.5
23 Macy’s $35.1
24 Allstate Corp. $35.0
25 State Farm Mutual Auto Insurance Co. $33.

So almost a third of Google’s top advertisers are retailers and offcourse it’s largest customer, Amazon, is also a direct competitor. From the same AdAge piece:

Walmart Stores and Sears Holdings Corp. (parent of Sears and Kmart) cracked the top 10, and four other retailers made the list of the 25 biggest spenders. However, there’s good reason to have expected more stores to make the ranking, considering that search is the dominant digital-ad format for direct-response advertisers like retail brands. Retailers are expected to spend more than double what any other brand category will pay for digital direct-response ads this year, according to eMarketer.

So retailers – both large and small – embraced Google search and have been imperative to it’s success. The question now is, will Google’s increasing efforts to connect consumers with stores help their ad customers or perhaps offer a challenge? The WSJ article nails it:

Some retailers said they worry the move will turn Google from a valuable source of traffic into a marketplace where purchases happen on Google’s own websites. The retailers, who wouldn’t voice their concerns publicly, fear such a move will turn them into back-end order takers, weakening their relationships with shoppers.

Google has a fine balancing act to ensure but then again, maybe it has no choice; as more and more consumers prefer mobile and use apps to shop, this move is perhaps needed to stay relevant. (I’d love to hear your thoughts on this in the comments).