August - 2000 - issue > Cover

Spending on online advertising is reaching eye-catching proportions in the US. A study released in August 1999 by Forrester Research indicated that last year’s top 10 advertising deals in the US alone accounted for $850 million. Forrester forecasts that spending on online advertisement (in various forms) by marketers is poised to triple by 2003. Does this level of spending imply that the inherent value proposition of online advertising to marketers is becoming pronounced? Whether it does or not, it is clear that the presence of this medium can only grow in times to come.


A Closer Look At

The Value Proposition

The business of Internet advertising technology has been evolving as the Web penetration level in the US continues to increase at 15 to 20 percent per year (over the next 2 to 3 years). Going forward, the biggest draw of online advertising is likely to be the clout of its technology – the unique ability to deliver dynamic, targeted interaction with the consumer (on PCs and non-PC devices), the increasing ability to provide online marketers with the facility to accurately measure its effectiveness and return on investment. Up to this point, for most marketers, the return on online advertising investment has been either blurry or elusive largely due to the lack of common metrics for what to measure. Even if metrics are adopted, there is far too much diversity in how to measure the return. Existing deficiencies in both online advertisement tracking technology and lack of common-denominator measurement maturity appear to be inhibiting the demonstration of a clear and compelling business value proposition.

Today, the vast majority of online advertising suppliers price the advertising in “Cost Per Thousand,” or CPM, terms. This pricing model mimics traditional print media and is focused on measuring the amount of advertising delivered to the target audience. Current levels of returns for marketers on such pricing models may be less than compelling when traditional return on investment analysis is applied. To illustrate using a simple browse-click-buy scenario, a financial periodicals marketer that coughs up $30 CPM is paying 3 cents each time a single pair of browsing eyeballs views its advertisement. Assuming a click-through ratio of .5 percent, the marketer is effectively paying $6 to convert browsing-eyeballs to visiting-eyeballs. Finally, if a visit-purchase ratio of 1 percent is applied, the marketer is paying a customer acquisition cost (purchasing-eyeballs) of $600. In most cases, marketers are looking hard at whether these costs of attracting new customers are in fact exceeding the customer’s lifetime value (average annual profitability per customer times number of loyal years), especially given the unpredictable loyalty of Net customers. Online marketers are also comparing the online business return proposition to that from traditional advertising media.


The Relevance Of

New Economy Pricing Models

Going forward, online advertising suppliers will likely enhance the value proposition of online advertising by innovating New Economy pricing models.

Instead of CPM-based pricing, these suppliers will leverage “pay-for-performance models” where marketers will pay based on the amount of advertising “successfully” consumed rather than the amount merely delivered. Clearly, such pricing models (and derivatives based upon this) are suited and designed to better exploit the capabilities of the Internet. The initial acceptance of these models is likely to fuel the development and common acceptance of normalized metrics to consistently measure business return on online advertising. In some cases, online advertisement suppliers may bundle certain value-added services (such as real-time tools for measuring and monitoring the efficiency and effectiveness of investment in online advertisement) to augment the value proposition. Eventually, higher levels of commoditization will result, which is likely to fuel more efficient and organized inter-company trading or bartering of online advertisement “contracts.”

Dot-com wannabes may also stand to benefit from the evolution of such New Economy pricing models. Inclusion of these models (rather than CPM-based models) may add greater credibility and realism to the line item in their revenue models, which indicate their expected inflow from sales of online advertising for their sites.


The Intranet

and Online Advertising

As existing online advertisement models evolve, the intranet (and extranet) is likely to make forays into this industry. Both marketers and employee-intensive corporations will take the initiative to explore the cost-benefits of permitting selected advertising on company intranets.

Initially, corporations are likely to be more selective about online advertising on their intranets by limiting it only to “empanelled” suppliers, partners or marketers. As the corporations become more comfortable with this model, there will be a significant increase in intranet space inventory that becomes available for online advertising.

The motivation for the marketers will be the ability to precision-target the advertising in companies (corporate demographics) where it is likely to matter most. Target companies that have implemented enterprise portals will heighten their desirability and value proposition for online marketers since such companies can typically tout an increased employee usage of their Intranet. Furthermore, this will provide online marketers with the ability to optimize their online advertising spending through a portfolio of Internet and Intranet advertisement spending.

Such a value proposition may be particularly compelling for companies with a large employee base. These companies can provide a potentially large latent (internal) audience that will repeatedly view the advertising on their Intranets. In return, these corporations can:

l Leverage the combination of a large employee base and hefty inventory of internal advertising space to generate modest advertising revenue.

l Negotiate more favorable terms from suppliers (for instance, staff augmentation providers) in return for advertising on the corporation’s Intranet.

l Provide its employees a preferred (better than market) pricing for orders placed by the corporation’s employees, effectively passing the benefit to the employee base (for example, allow a particular mortgage company to advertise on the Intranet in return for a lower-than-market rate).

l Benefit from leveraging any creative derivative of the one or more of the above revenue/payment models most relevant to the corporation.

The potential of such partnerships is further accentuated as the economics of such an implementation becomes feasible in large employee-intensive companies or even in federal or other governmental agencies.


The Final Word

Marketers will find that the business value proposition of online advertising will get increasingly compelling. Existing pricing and measurement models will undergo evolution and more efficient practices will emerge that better match the needs of online marketers in the New Economy.

As online advertising extends beyond current markets, existing issues will be resolved and new ones created. Concerns such as the impacts of an intranet advertising business model on employee productivity, internal bandwidth, costs of ad measurement and auditing, emergence of new Web ad-blockers, and other issues are bound to arise. And online advertising suppliers and technology innovators will continue to feel the pressure to meet new and emerging needs of online marketers, as the internet advertising space continues to expands itself.

The end-goal is to provide online marketers with the ability to leverage the Internet in a manner that is vastly different from traditional advertising media. This means providing the functionality to gain deep insights on consumer behavior — insights that will propel radical rethinking of existing advertisement models.


Sunny K. Kapoor is vice president of e-business development for Primark. He can be reached at-skapoor@corp.siliconindia.com.