Monthly Archives: March 2008

Perfect Google-Click World

So, what would a universal cookie across both Display and PPC give us?  What could we look forward to, what’s the wish list of the online “ideal marketing world” we could live in when we really understand how Display and PPC interact

I’ll give it a start, feel free to add to this wish list…

1.  From a macro web advertising perspective, all available Google-Click “space” is capable of being optimized for performance – whatever your definition of “performance” is.  That means an end to the idea of the space being attached to a pricing model – for any given space, you might see either a PPC ad or a Display ad. 

Hopefully, the advertiser would have some control over this allocation, deciding if / when which pricing models are used in which spaces, similar to the controls over pricing model existing in AdSense today.

I realize running Display units in Search inventory may seem counter-intuitive, but the key is pricing control.  The web desperately needs a more effective way to expose people to ideas they have never heard of in context.  Running random display units across opaque networks is not a particularly good way to do this; running targeted display units based on search history – a more advanced form of behavioral targeting – would do the trick.

Likewise, running PPC ads in tightly segmented display spaces can lead to big payoffs, as it did in the Lab Store example.

2.  A real gift would be some cookie-based sense of where the visitor is in the funnel, probably based on the search phrases they are using. 

“Level 1” would be no prior interest, “Level 2” would be “uses single word searches” on the topic, “Level 3” would be “uses multi-word phrases” on the topic, and so forth.  Visitors in the unknowing or shallow knowledge Levels would be exposed to cheap Display units – both in Search and in Display inventory.  Those expressing active interest (Engaged, if you will) would be exposed to PPC units, again, both in Search and in Display inventory.

You’d need some kind of history control on this, because the data set would probably get too huge.  Say for example, trailing 30 days interest, so you make sure the visitor is still Engaged with the topic.  As active searching on the topic dropped off, you’d kill the data off, because it’s no longer relevant.  If it starts up again, so be it, but a restart is a new profile.

Other ideas from the crowd?

Given cross-site tracking already exists for Display, do you think there will be any Privacy problems if Search History was used to target outside of Search?  People are pretty used to seeing ads based on searches in the search space…why not bring that over to Display?

Do you think Google-Click will give us a “universal cookie”, or will they keep the Display side in the dark for the sake of Brand-oriented folks who only care about impressions?

 

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Incremental Value of Gift Cards

The following is from the March 2008 Drilling Down Newsletter.  Got a question about Customer Measurement, Management, Valuation, Retention, Loyalty, Defection?  Just ask your question.  Also, feel free to leave a comment. 

Want to see the answers to previous questions?  The pre-blog newsletter archives are here.

Q: I found your web site through a Google search on “incremental business” and “gift cards”– but, then again, you probably already know that.  Didn’t find anything specific to “gift cards” on your site, but I’m wondering your opinion of them as CRM tools?

A:  Well, as I’m sure you know, they can be used in lots of different ways.  From an incremental perspective, some approaches are not so profitable and others quite profitable.

Q:  My quest at the moment is to try to help a client “prove” the incrementality of the business produced through gift cards and what avenues of sale might be more profitable than others.  Is there a correlation to this  quest and information in your book, i.e., marketing model versus financial model, success based not on “response” but on “profit” of the program?

A:  That’s pretty much what the entire book is about – how do you set up, test, and measure these kinds of ideas? The marketing model IS the financial model, from my perspective.

Q:  By the way, I’m not the only one pondering this in my industry.  Might be a topic you want to explore in your future endeavors which would be of interest to a host of us.

A:  OK, let’s do some of that.  My answers to e-mails like this frequently become newsletter or blog material (and I won’t reveal who asked the question), so perhaps I can both help you and get some writing done!

From a broad perspective, I don’t think there is any way to know the answer to your question without testing using control groups, and the ability of the client to execute on that idea can be limited if they are a mass retailer.  Plus, you have not told me anything about your client or how they promote the cards.  So we probably have to speculate based on what we know about behavior in general from other sources – loyalty programs and so forth.

In my mind, there’s no question that some portion of the gift card business is incremental.

You start with the breakage – cards not ever redeemed.  If I give a gift card to someone who doesn’t use it – $8 billion in gift card sales last year are in this bucket – then as the retailer ISSUER (as opposed to the gift card seller) I have to be in the black on it, from an operational  perspective.  I can’t see any way there’s no incremental profit in that idea.  Incremental SALES, maybe not, but profits?  Have to be there, industry as a whole.

In case the above is not clear, the issuer would be where the card is redeemed.  Originally this point of clarification would not be required but as you know, now there are lots of stores that sell gift cards from other retailers!  Whether that kind of operation is incremental to the SELLER of the card is a merchandising issue, but I’m pretty sure it is incremental to the ISSUER – the store where the card is to be redeemed – based on the industry breakage.

So, if your client is a retailer, an ISSUER that sells their own cards, either through their own store or other stores, than I’m pretty sure there is incremental business there. If they are a seller of other store’s cards, or a processor of some kind, then I’m not sure.

But let’s say 100% of cards are redeemed.  Now it’s a little more tricky, you have to look at the incremental cost of the cards / processing versus the “float” on the money.  This is a pretty simple equation.  The costs are whatever premium may be charged for the creation / processing of the cards versus the interest on the money taken in from the sale of the cards.

For example, if the average “days to redemption” of a card is 90 days, and the average value of a card is $100, and the interest I can get on that $100 is 4%, then I make $1 ($100 x 4% / 1/4 of a year) for every $100 card I sell just on the “float”.  If the incremental costs (say, versus a regular credit card transaction) to issue and redeem this card is less than $1, then as the Issuing retailer I am making the difference as incremental profit – even if there is 100% redemption, which for sure is not the case.

Now, if the retailer is doing something else with these cards – using them as rewards, store of value, etc. – the story could be different.  For example, “buy $100 worth of merchandise and we will give you a $5 gift card” or “redeem your loyalty points for a gift card”.

That’s a different story, now the card is not a “product” it’s a transactional device / store of value and that changes the dynamics.  In this case, the card is no different than issuing coupons and you get into problems because these kinds of promotions tend to attract best customers, and their purchases using the card may not be incremental.

As far as incremental profit goes, now you stand a good chance of being in the hole, at least with the best customer segment.   And since frequently the volume of losses in this “best” segment for promotions like this will dwarf any gains from these promotions on any other segments, you end up in the hole with incremental profit.

Put another way, the best, most engaged customers are highly likely to purchase anyway and giving them a discount changes nothing about their spend, they simply buy the same amount at a discount.  This aggregate discount is usually greater than the aggregate incremental profit on not-so-best customers, so the entire promotion operates at a loss.

The good news is this: the actual incremental profit of programs like these is simpler to measure, because you have all the transactional data and you can control / put parameters around the issuance.  Typically in a scenario like this you would  set issuance rules that threshold above the average spend rate of the customer segment.

So, for example, let’s say the average monthly spend of a best customer is $80 or $960 a year. The correct promotion then looks like this: buy $100 worth of merchandise **this month** and we will give you a $5 gift card.  Hopefully, at minimum you would see a total spend of $980 that year – $20 more than average.  You would be on your way to incremental profits at this point, depending on what margins are in the business.

What you *do not* want to see is the customer spend $100 during the promo month and then spend $60 the month after, which is a typical thing that happens with best customers.  This is a sign you are not driving incremental sales, you are simply moving the existing spend around and giving up $5 in profit as you do it.  Not good.

For more on setting up these kinds of tests and measuring these types of effects, see this article.  Hope that gives you – and the rest of your industry – a starting place!

(Follow-up Question)

Q:  You have however validated my thinking that we can’t measure incrementality without creating control groups.  In asking the question, I was second guessing myself and wondering if there was something I was missing.  I think to some degree we can use existing sales data to measure uplift (either over the value of the card itself or over the client’s average transaction) for the current purpose which would move them to the next phase of specifically measuring incrementality.  For this, I’m sure your book will be helpful and I shall use it accordingly.

A:  Yes. Along those lines, in the “threshold” example, we have seen a $10 off $50 generate an average sale of $120.  Given the customer segment had an average purchase of $45 – hence the $10 off $50 – it would be safe to assume there’s some incremental in there, and long as the customer segment spend doesn’t tank by $70 or so over the next several months, you could assume pretty safely you have incremental profit.

“Proof” is another thing, but if you’re dealing with pure retail, proof is a matter of degree, you take what you can get.

(Follow-up Question)

Q:  P.S. Your point about the promotional use of cards, this company has separate business units which are their own P&L centers.  So, while the promotional use of cards might be incremental to the business unit which runs gift cards, it’s only incremental to the company to the degree that it produced new business or “stole” it from a competitor less than value of the gift cards it took to produce.  Again, greatly value your time and input.

A:  Yes, well, that’s quite another matter, and gift cards are not the “root cause”, if you know what I mean.  There is a long tradition of “intra-company sales theft” between divisions that seemingly goes unchecked.  A lot of direct marketing companies are sensitive to this issue, but that’s because they can measure the effects,  Even then, there are only a few who have really unlocked the riddle of how much / where / when it happens, especially relative to web sites versus catalogs and retail stores. Segmentation of Recent customer buying patterns is the key.

Anyway, this is a “governance” question (strategic), not a marketing / gift card question (tactical).  If a company really wants to measure channibalization, they can by setting up specific tests and using control groups to measure outcomes.

The question is, do they really want to know the answer?

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*** Print Outperforms Digital

If you are interested in some of the broader Marketing issues that have come up in this romp through Display Advertising in Social Media, the Wharton School recently published a couple of pieces.

This first one talks about the Engagement Value of snail mail versus e-mail.  Some of the interesting quotes:

“In marketing [terms], email is transactional; paper is relational.”

“It seems like a person sending a written note vs. a person sending email is investing more of himself or herself in that communication. It takes more effort to write a letter, and people often equate effort with how much a person cares.” 

In other words, an electronic relationship requires very little investment on either side, so the level of Emotional Impact it creates versus print is lower.  I have seen this in action, for example, using post cards to re-activate (sorry, re-Engage) lapsed online customers. 

Here’s a link to the article: ‘Dead Tree’ Medium No Longer: For Many Marketers, Print Outperforms Digital

Related to my examples of Social Media that Works, and especially the Moms Tampa Bay project, we have an article on mixing and balancing professional with amateur content and the Trust issues there. 

Couple of quotes:

“Some things that look amateur are professional and vice versa. You never really know what’s going on. And it’s hard to track these things down without cross checking. The digital environment is putting an enormous responsibility on the consumer.”

“It’s amusing that two of the examples the Newsweek article cites as examples of the ‘revenge of the experts’ — Mahalo and About.com — are what I would call amateur sites. They don’t use professional journalists or researchers; they use knowledgeable enthusiasts to serve as human filters. The fact that those human filters get paid doesn’t change anything. What makes someone an amateur isn’t the absence of money; it’s the absence of traditional credentials.”

Here’s a link to the article: Experts versus Amateurs: A Tug of War over the Future of Media

Have a good weekend!

PM Update:

See also User Generated Magazines and The Future of Advertising for additional thoughts in these areas.

P.S.  Speaking of offline verus online Relationships, Engagement, and Trust, if you’re going to the Toronto eMetrics Marketing Optimization Summit, I’ll be teaching the WAA BaseCamp session Monday and speaking on Tuesday – see ya there.

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“Social Media” that Works

So what kind of social media really works for display advertising?  I have 2 examples.  They’re not poke-me, friend-me, follow-me kind of apps, so perhaps some will tell me they are not “social media”.  But they are successful in a Wiki way, and have some interesting lessons to teach us, I think.

Wisdom of Crowds

Angie’s List is an interesting example using multiple revenue models.  Over 600,000 members pay (yes, pay) about $50 a year (differs by city) to belong to a community of people looking to hire the best service companies in their area.  Members post their experiences with every local company from plumbers to auto repair shops into a database searchable by anyone who is a member.  Companies are graded and ranked by their performance, with testimonials (no, make that UGC) posted by each user (sorry, customer).  There’s a few more twist ands turns, but you get the idea.

On top of that, they send a very nice slim-jim monthly magazine to all members, which if you think about it is an super-targeted local ad vehicle for these service shops.  I talked to one guy I hired (re-modeler) who said 1 year of advertising in that Angie’s List mag generated more closed sales for him than 5 years in the Yellow Pages – and a year costs 1/20 of what an annual Yellow Page ad costs for the same size.  Yikes. 

That’s display advertising done right.  All you have to do is look up the company in the Angie’s magazine ad on Angie’s List.  The companies with Ratings of “A” and lots of glowing testimonials say their magazine ads work like gangbusters.  I imagine companies with “C” ratings and UGC horror stories say their magazine ads suck.

Go figure.

Then the companies who fall to a “C” get barred from advertising in the main part of the magazine any more due to poor ratings on the list.  New companies not on the list can attract Attention to themselves by advertising in the back “classifieds” section, in hopes of getting “A” ratings and the opportunity to advertise tin the main part of the mag.

Self-policing, continuous quality improvement.  The Attention improves in quality over time.  Sure, “ratings” are very e-Bay-like.  But the online / offline approach to maximizing Marketing Productivity for all sides is fully integrated and just very smart Marketing, they are working the model to full potential.

This community, though small by MySpace standards (that is, if all those MySpace members are active), has a very valuable, tangible reason to be working together on this shared database.  And because they put so much value on this relationship (they pay to participate), there is a lot of value in the relationship. 

You see this same pattern time and time again in display media; the more people are willing to pay for the content surrounding the media, the more valuable advertising in the media is.  It’s that fashion magazine thing again, the ads are part of the content

We know how much people are willing to pay for a membership to MySpace or FaceBook…

Offline Front End

Moms Tampa Bay is a very basic chat board idea – mothers in the Tampa Bay, FL area post questions and provide answers on family and child care issues.  It was built by a local TV station and soft launched in May of 2007, currently at 2700 members or so.  Just recently, they have started heavier promotion of the board on the TV station itself.

Now, it’s not hard to understand the display advertising opportunities on a site like this, this display model is a proven one because the members have well-defined interests and needs.  They’re paying Attention.  The fact they are all local people drives further targeting capability and some unique social opportunities.

For example, the TV station is going to launch an “issues show” based on the topics discussed in the community, with members from the community as the talent.  This kind of exposure is sure to cement the relationships and drive further participation.  YouTube local on real broadcast TV. 

“Mabel, I could be a staaahhhh…”

The station / members could do all kind of things to expand on this core idea – publish guidebooks, produce educational videos, hold events – all of it sure to attract advertising dollars. 

No brainer for many categories.

Now, TV is not known for being very good at one-to-one, and this board is far from perfect.  There are risks the station could screw this up by pushing the group too hard or far, and I’d bet they would benefit from an experienced online community manager / more resources.  But they seem to be doing pretty well at it so far, and to me, it’s quite ironic to see the old broadcast model going vertical using online, just as the onliners are trying to do broadcast…

Both sides can’t be right.  My bet is the media itself defines what you can so with it successfully, and you can’t simply decide to “break the rules” and get the result you want.  FaceBook and MySpace are devoted to people who want to create a free media platform for themselves.  Just like GeoCities and Tripod. 

With similar results on the display ad side.

I want to make it clear I’m not dumping on MySpace or FaceBook as being “useful” or even essential to certain groups of people for specific purposes.  What I am saying is while the utility to the user might be extremely high, the value of the space surrounding this content is quite low for display advertising purposes.

Other than display ads targeted to the specific needs of people in that group with those media platform goals, there is no reason to believe general display advertising will ever be successful in that environment. 

There’s No Attention to spare.

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Google-Click Has Answers

Well, we’ve been on quite a roam through the world of online advertising.  We discovered how to make AdSense work, speculated on what that test means for Social Media, and spent some time running down the Relationship between Engagement and Attention. 

Other than the actual test on the Lab Store, a lot of the conclusions reached throughout this trek are really speculation, because we just can’t get the information we need to do a comprehensive analysis.  However, there are an awful lot of coincidences out there, and I dare say some of this speculation (thanks for the Comments to all who participated!) will probably prove true.

Regarding the Social Media business model, the speculation surrounded the idea of “the more Engaging they make it, the less Attention people have to pay to Ads”, which leads to the widely reported problems with social media ads.  I asked how they could change this to create a more effective advertising environment.  Barring any improvements in (what participants speculated to be) very poor ad targeting mechanisms, here’s a suggestion: Do what happens when every web ad business model fails – create vertical spaces.

The web is simply not suited to be a “mass media”, the economics don’t work.  The web was born to be segmented, niched.  By creating vertical social sites, you address a lot of the context problem and the display ad model begins to function more appropriately.  Not to mention the traffic would be of higher quality relative to the ads. 

More like a Topical Chat Board, don’t you know.  Ads that make sense to the context of the visitor, for a change.  Display Ads that people don’t hate or want to block.  What a concept.

Hopefully, Google-Click (the merger of Google and Double-Click) will provide some real answers.  I think they can, if they choose to. 

I think it might even be likely they will, given the stroke of genius giving Analytics to ad clients was.  The more people know, the more they spend.  Transparency is king.  If the display model ever wants to deliver some weight, if it is ever going to attract the big media players, they have to make these ad networks more transparent.

I still have a lot of questions about the validity of the display ad model as it is implemented today, with opaque, untargeted networks as the rule.  But imagine the transparency Google-Click could bring to the whole equation with a unified cookie across Search and Display. 

We could finally begin to understand the true incrementality of the relationship between Search and Display.  Even more so, if Google-Click would facilitate the use of Control Groups.

We could finally address the legendary view-through measurement problem that makes me shudder every time I hear view-throughs used to bolster the value of a poorly performing display campaign.  If you’re not clear on how important a common Search / Display cookie is to resolving the issue, this post by Avinash should help

And with the kind of automation Google could bring to display, we would finally get rid of the value-destroying human overhead that cripples the display business model (placements, contracts, billing, verification, management), and then be able to price it correctly versus the value of it.  Then the agencies could spend a lot more time on what they are good at – strategy, creative – and a lot less time on paperwork.  Everybody wins with Google-Click.

That is, if they take the same path they took with AdWords / AdSense / Analytics.  Transparency, Optimization.  Display space can become PPC space – and with highly in-context spaces, vice versa.

This approach would probably bring us to a place that looks a lot more like cable network advertising does today.  100 – 200 “channels” or so of targeted, contextually-cohesive content for display to sit in.

I don’t think the web will ever be able to deliver the weight (GRP’s) of a broadcast TV network.  But a cable network?  Maybe.

It’s time to leave the broken offline “print model” used in online display ads behind.  Because the web is different.  Right?

Google-Click just might prove it.

——————————–

Your thoughts? 

Do you think you would get increased value from tracking Display and Search in the same interface based on the same cookie? 

Perhaps this event might even “force” a valuable unification of the Display and Search teams / agencies?

Dream On, Jim?

The next post in this series is here.

 

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Too Engaged to Pay Attention?

So we take the report on Natural Born Clickers and the results of our Lab Store AdSense Optimization and what do we have?

I’m thinking about a basic model for understanding the potential effectiveness of online advertising based on Engagement.  Basically:

The more Engaged a person is with the task at hand, the less Attention they have for out-of-context advertising.

The gross amount of Attention available on the web is finite.  That means if you pay Attention to one thing, you have to ignore something else.  This creates Attention winners and Attention losers.  In general, for any space available for advertising, in-context wins and out-of-context loses.  That’s Relevance, right?   Therefore, out-of-context ads should be much less effective than in-context ads.

So, for example, if the task is Research, and a person is using a Search Engine, the PPC ads focused on the Research topic are highly relevant and Attention gets paid to them.  Also, in the same Research mode, if a person is searching or participating in a Chat Board focused on the topic, display ads focused on the Research topic are viewed as highly relevant and Attention gets paid to them.

However, if the task is (for example) interacting with a social media account, then very little Attention is available for advertising – PPC or otherwise – because all other advertising would be out of context with the task, except ads directly related to the task, such as for widgets or tools.  This effect would generally explain the concept of Banner Blindess, since most display advertising is completely out-of-context.  People just learn to ignore it.

Not breakthrough thinking in Consumer Behavior or Psychology but for Online Advertising it might be, considering the number of business models nowadays that plan for “advertising” to be the revenue stream.  In fact, it’s quite possible that the more Engaging they make these social apps, the less effective the Advertising will be.

It’s about the limited amount of Attention any one person can have.

When ads are in context, you get an effect much more like that of Fashion or Hot-Rod Magazines, where the ads are part of the content, they are part of the Engagement and so get Attention.  Out of context, much less Attention, if any.  Not part of the content, screened out.

For the same ad, PPC or Display.  In other words, it’s not the delivery method that matters, it’s the context and available Attention.  PPC ads by their very nature just happen to have the context problem solved.

For example, a TV ad running in the middle of a favorite TV show is much more effective on an individual than the same TV ad that plays in the background while someone is Engaged with a project on the computer.  Same ad, different context.

Now, here’s the thing.  This idea makes a lot of sense.  Can we expect anyone with scale to test it, prove it empirically?  I dunno, because an awful lot of business models will get completely hammered if it is true.

The test would be pretty simple:

1.  Define Engagement – really not too hard for this, it’s how many “actions” take place per unit of time.  Seems to me this would capture the whole Attention thing; if you are busy taking actions, that’s where your Attention is. 

2.  Run both in-context and out-of-context ads during the measurement period.  Display or PPC.

3. a.  Measure clicks and conversion, if that is your game
    b.  Measure Awareness and Intent, if that is your game

4.  Compare results

Does anybody think that out-of-context advertising would win, or at least match in effectiveness?

If there is a difference, what does it mean for biz models relying on out-of-context impressions?  What can they do to correct this problem?

The next post in this series is here.

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Chat Boards vs. Social Media

I’m a bit surprised nobody asked what kind of sites we kept during the $155 to $5 per new customer optimization of the Lab Store AdSense Campaign.  But I guess I should not be, as folks probably just assumed it was a straight ROI thing.  And it was.

But often, I think people miss out on really learning something because they just follow the numbers and never ask why.  Why does the optimization work like it does?  Because if you understand the Root Cause, then you take away learning that you can use the next time around.  This result as opposed to robotically optimizing the same stuff over and over without learning anything transferable.

For example, what is the psychology or sociology behind why certain optimization choices worked?  What conscious or unconscious mechanisms cause people to do what they do?

Many folks interested in “why” might then go to surveys, but the problem with that approach is people often find it difficult to tell you why they do what they do.  This is where a basic knowledge of Psychology and Consumer Behavior can be extremely helpful.

So which sites did we keep? 

There are 3 answers, depending on your point of view; yet all 3 answers below apply to all the sites that made the cut:

1.  Optimization – the sites with the highest ROI

2.  Consumer Behavior – the sites delivering an experience most like Pay-per-Click ads in the search engines

3.  Psychology – the sites where the audience is in a Listening Mode

Reasons 2 & 3 are why Reason 1 happened.  Reasons 2 & 3 are why chat boards and similar sites delivered the highest ROI.  Where it gets really interesting and drives a theory, is when you toss in that Social Media had the worst ROI.

I mean, what’s the difference between a Chat Board and MySpace, a difference that produces a cost per new customer of $5 versus $155?  One could argue they are similar – communities, connections, etc.  First there were online Discussion Groups, then Chat Boards, then Social Media.  Same idea, just with progressive technology improvements. 

Right?

I don’t think so.  I think there is a clear reason the results are so different.  One of the above is not like the other two, from a Behavioral and Psychological perspective.  Here’s my personal theory why in general, AdSense in Social Media sucks so much compared with AdSense on topical Chat Boards:

Discussion Groups / Chat Boards are about “how can I help you?”; Social Media is about “how can you help me?”.

Discussion Groups / Chat Boards are more about Social; Social Media is more about Media.

Discussion Groups / Chat Boards are about Learning; Social Media is about Connecting.

Therefore, Discussion Groups and Chat Boards are a much better environment for AdSense, because people engage these environments to absorb information and listen; people engage Social Media to broadcast information and speak.

And an audience that wants to listen is simply a better environment for display ads than an audience that wants to speak.

If the above is true, there are enormous implications for creating successful products, ad copy, and landing pages for these different environments.  And critical implications for entire business models.

Thoughts?  Please feel free to poke holes in the above theory, explain the same theory in a different way (perhaps using words that make more sense to you), or provide an alternative explanation!

The next post in this series is here.

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Lab Store: AdSense Finally Works!

I have a very long history with PPC marketing.  When GoTo finally syndicated their ads to Yahoo, I thought, man, this is brilliant, this is what will make web advertising work.  Advertising at the point of demand (the search), with scale because syndication removes the site-centric orientation.  A direct marketer’s dream, let the testing begin!

AdSense, however, has always been a poor performer for the Lab Store (and many other commerce businesses).  AdSense is really a banner ad with lipstick on it, only marginally attached to the point of demand by context, and not by action.

We’ve tested it many times and always with the same result – unbelievable numbers of impressions and no sales.

In the last test cycle, we finally stuck pay dirt.  Behold, AdSense finally delivering value to the Lab Store:

(click to enlarge)

As you can see, we started out with a Cost / Conversion of about $155.  This ain’t going to work, because the net value of the customer generated from “context ads” is only about $65.  We’re literally losing money every time we make a sale.  But this time around, Google finally provided all the tools we needed to optimize this system, namely:

1.  More advanced control over site selection. 

In the earlier stages of this capability, we could not kill some sites without killing others, so it was not as flexible as we needed.  The most I could find out about this issue was it had something to do with the nature of the AdSense distribution agreements.  As of this summer, something had changed and we had finer levels of control.

The first thing we did was to kill any sites in Social Media land (primarily MySpace), which is where you get the first dogleg down in Cost per Conversion.  Then we continued to selectively prune more sites with the same profile as MySpace – tons of impressions, worthless traffic.

2.  Ability to change pricing models.  

Google allowed us to go from impression pricing (CPM) to click pricing (CPC).  Since we now had pruned the site list down to the most relevant, we were able to jam the price we would pay per click way above the equivalent CPM Google was getting from us before this change so we could own the real estate.

Look what happened – the next dogleg down in Cost / Conversion, finally stabilizing between $4 – $5 per new customer. 

This cost we can live with versus the net customer value of $65.

I know some folks may concern themselves with advertising higher up in the “funnel”.  Gee Jim, what about “awareness”?  How do you reach folks that don’t know about you, folks not searching for your products?

The answer is in the chart above.  I can’t afford to generate awareness, it costs too much.  Generating 400,000 impressions on MySpace basically creates awareness among people who are not interested.  I’m sorry, but I simply don’t see any value in that.

That’s what the mass media are for.

We have tons of high-ranking site content that generally addresses the awareness issue, if a person is casually interested enough in our category to do a simple search.  If they are not interested enough to even search, then why would I want to advertise to them?

I only want to advertise to people who are interested in our category.  Pull, not Push, if you know what I mean.  Relationship Marketing.

Just a beautiful business model I tell ya, this advertising at the point of demand.  As long as you only have to pay for the real demand, that is.

Thanks for making the changes, Google.  Some implications for display ads as a result of this test are discussed here.

How are your AdSense ads doing, have you been able to optimize them to profitability?  Or have you abandoned them completely?

The next post in this series is here.

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