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.

Searching For Products Online

A interesting piece by Fool notes just how powerful and influential Amazon is in the product search funnel. They mention a recent survey result:

Nonetheless, a recent survey commissioned by BloomReach found that 44% of online shoppers in the U.S. began their product searches on Amazon.com. Just 34% use search engines such as Google, and the rest use other retailers’ websites. That’s a pretty poor position for the Alphabet company, which relies on product-related searches for a big chunk of advertising. What’s more, the prospects are good that Amazon will continue to gobble up product-search share.

Interesting stuff, read more here.

The question in my mind is; will mobile help Google i.e can they innovate in voice (Google Now) or visual (Glass) so Amazon is less relevant or perhaps will mobile make Google less important in product search?

The answer not only affects Google but almost every merchant and marketer on the planet.

Googleopoly

OK, it’s finally happened, the EU today have officially declared Google a monopoly. As Google themselves note, there are plenty of popular websites on the web. And companies are making a lot of money on the Internet.

Any economist would say that you typically do not see a ton of innovation, new entrants or investment in sectors where competition is stagnating — or dominated by one player. Yet that is exactly what’s happening in our world. Zalando, the German shopping site, went public in 2014 in one of Europe’s biggest-ever tech IPOs. Companies like Facebook, Pinterest and Amazon have been investing in their own search services and search engines like Quixey, DuckDuckGo and Qwant have attracted new funding. We’re seeing innovation in voice search and the rise of search assistants — with even more to come.

That said, Google has been a monopoly on the Internet for the last 15 years. So two questions come to my mind. Firstly, why has the EU decided to charge Google on anti-trust now and not 15 years ago? Secondly, is Google’s monopoly about to end?

To me, the EU itself is absurd let alone these charges today but there’s no denying one thing; Google is a great thing (and a even greater business!)

Google Store Confirms Value of the Store

As we discussed previously regarding Google’s increasing ecommerce efforts, the company has gone one step further now by not only opening it’s first physical store in London, but more interestingly, it’s own Google Store.

Google Store

Source: Google

As the company says in a blog post:

“You can shop Nexus phones and tablets, Chromecast and Chromebooks, learn more about newer technology like Android Wear, Nexus Player and Nest, and stock up on accessories like cases, keyboards and chargers,”

Undoubtedly, as we saw with the Microsoft Store, this is a case of seeing those thousands of folks at Apple Stores and thinking, we need to do this too. Now, we can’t fully attribute Apple’s rise from struggling bankruptcy threatened pc maker to the world’s most valuable company to stores. But undoubtedly, the stores – both Apple Store Online and their 450+ physical counterparts – have greatly contributed.

The human experience is something we can’t live without, despite the rise of the Internet as a way of doing commerce. Sure, we are more and more liking the convenience and pricing of Internet retail but nothing beats the theatre of a great store such as Apple. The question for those like Google following their lead; can they also be great at Retail?

This is a competency that requires mastery of the physical store environment, Apple developed this between Jobs and Ron Johnson over the best part of a decade. Other great retail experiences such as those at leaders like Costco and Whole Foods with food or Macy’s and John Lewis department stores, Zara and Forever 21 in apparel or IKEA in home furnishings have been refined over multiple decades. Interbrand released a great report summizing what it takes to join this club.

But getting the physical store right isn’t enough, Walmart have long been a leader in mass merchandising yet have until recently, struggled online, particularly against Amazon. The reason they’ve struggled? Unlike Apple and others, they haven’t been able to offer that truly integrated online-offline experience. In today’s world, the relationship between an ecommerce store and it’s physical counterpart is vital; if you don’t meet the consumer’s needs by offering a seamless experience, you will struggle to compete.

No doubt Google’s Store is a work in progress, what remains to be seen is how serious they are about Retail. What is for sure is that the role of the Store for those businesses selling to consumers is more valuable than ever.

Online to Offline Opportunity

It looks like Wanda, the Chinese Real Estate (Shopping Mall) company is attempting to do what no other company online ‘marketplace’ has done thus far – online to offline. eBay has made attempts and failed, likewise Google and Amazon to a large extent. Possibly the only player in the space today of scale is Instacart, who ironically have just raised a ton of money to go after the opportunity.

TechCrunch notes:

Wanda E-commerce hopes to differentiate from Alibaba and other rivals like JD.com by focusing on an online-to-offline business model. Wanda claims that its various holdings give the “world’s largest offline consumer network,” with 1.5 million customers in 2014, a number that it expects to reach six billion by 2020. The company’s advantage is that it already has a significant number of brick-and-mortar retail businesses that it can leverage to gain customers and data for its online services.

The opportunity is unprecedented – attempting to develop a true multi-channel marketplace model that allows shoppers to seamlessly shop in store and online. How exactly Wanda will pull this off (like Instacart’s financials) is unclear at this stage. For sure, we’re not seeing the rise of bricks and mortar utilizing this model so there’s no reason it shouldn’t work for the marketplaces either.