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.

3rd Party Brands Online is Almost Mission Impossible

The WSJ has another interesting piece on the hotly covered ecommerce startup Jet.com. If you’re selling third party brands online you’ll know this but if you’re thinking about it please read on:

Over the summer, the company said it would spend $100 million on ads in the first 12 months after the site opened. In the recent plan, that total had grown to nearly $300 million. The money is fueling television spots, subway posters and online ads—including nearly $10 million spent on Google in October, according to people familiar with the figure.

It takes $300 million to market a third party branded ecommerce website in 2015. Ouch.

Putting aside the fact Jet is a large, venture back outfit, the costs for any startup doing the same will still be very steep. This is what killed Webvan and caused the dotcom bubble. In essence, competition in ecommerce has the same economic factors as physical offline commerce. Sometimes people forget to be rational with customer acquisition.

So how do you compete other than paid media? One answer is social media aka word of mouth and arguably it’s is the best route to market today for online ecommerce startups. It’s also something Jet will be hoping to rely on in the future (as Amazon does) to avoid becoming another Webvan.

Marketing Costs are Real and How to Compete

Many folks think that with ecommerce, you essentially don’t have the typical marketing spend you would need with a physical store. This is probably one of the biggest myth’s out there with regards to online retail; in fact, the opposite is true and the costs are very real. Take this quote from Recode on soon to launch ecommerce startup Jet.com:

Or, the idea may simply be too expensive to build. Lore has previously said the company is budgeting $500 million for marketing over the next five years.

$500 million, on marketing, for a startup that hasn’t even launched. Or take a look at what the biggest retailers spend on Google to market their goods as noted by Wordsteam:

Amazon – Spent $55.2 Million on Google AdWords
Ebay – Spent $42.8 Million on Google AdWords
Macys – Spent $35.6 Million on Google AdWords
Sears – Spent $34.3 Million on Google AdWords
JC Penny – Spent $30.9 Million on Google AdWords

Amazon and Ebay spending over $50 million on Adwords is understandable in many ways given their entire business model is online retail. But look at the department stores; it’s no surprise to see how competition is essentially destroying all of the value in these businesses.

So what does one do if you’re a small scale ecommerce player with a equally small marketing budget? You have to compete in different ways. You will still have marketing costs, but the way you allocate that spend will dictate your overall chances of success. So if CPC and online advertising in general doesn’t work for you/your product(s), look to spend in other ways i.e email marketing, content marketing or even, offline marketing like events.

It’s worth re-iterating, the best and most powerful way to market your business is as old as time itself; word of mouth. Whatever you do that perpetuates word of mouth is worth pursuing vigorously. Once you have positive and far reaching word of mouth, not only are you not paying for it on the bottom line, it’s just the best way to connect with existing customers and your target audience.