A Look behind the Online Ad Numbers

The rise of online marketing has brought trailing after it another corresponding increase—in the number of studies produced about online marketing. Some of these are virtually interchangeable; others stand out for their grandiose forecasts, which often turn out to be constructed on suspiciously shaky statistical ground.

But one recent report on online marketing trends offers both a unique insight into advertisers and a solid methodology applied to a suitably broad base. The Burlingame, CA-based market research firm Outsell fielded a survey in November to 1,200 advertisers of all types—offline as well as online—who together control an estimated $2.4 billion annual ad spend, asking them where they intend to spend their money in 2006 and why.

The title gives away the answer: “The Annual Ad Spending Study: Where and Why Advertisers Are Moving Online”. But it doesn’t tell the whole story. For example, it’s a type of misnomer to say that advertisers are “moving” online, since according to the survey, 80% of the respondents already consider themselves to be using the Internet channel to get their word out.

Granted, many of them seem to be stretching the “online advertising” category to include simply having a company Web site up and functioning. When asked how they allocate the online portion of their marketing budget, those polled said that 33% went to Web site operations. That could include optimization for search marketing; but it probably also contains a large expenditure for simple Web hosting and maintenance.

Nevertheless, 80% is an unexpectedly high proportion of marketers including the Internet in their mix. And it will get larger. According to Outsell projections, that proportion will increase to 90% by 2008.

“We see online usage approaching full saturation by 2008,” says Chuck Richard, Outsell vice president and lead analysts. “There will be some markets where vendors will just decide that their clients aren’t online—perhaps someone reaching markets where there’s no cell phone online usage, or some very senior markets that don’t spend time online.”

The number of businesses that describe themselves as advertising online may seem high, Richard says, but that’s only the view from outside the marketing industry. “Eighty percent seems counter-intuitive because we sometimes have this view that people are still teetering on the fence,” he says. “But in reality, online advertising is no longer a question of ‘Should I?’ It’s now a question of where, how much and how fast.”

Outsell asked respondents what types of marketing they use, and how they rate those methods for effectiveness, both for lead generation and branding. No surprises in the top three methods: Event marketing, direct mail and print trade magazines led in both usage and effectiveness. But the Outsell survey discovered that 80% of the marketers polled also get leads through two online media, e-mail and search engine marketing, and the proportions that rate those as extremely or somewhat effective are high: 65.2% and 53.6% respectively. Advertisers also said they get leads through informational Web sites (75%), sponsored content such as white paper offers (64%), Webinars (63%) and online directories such as Internet catalogs (54%).

More surprising was the percentage of marketers who told Outsell that they use online advertising for brand awareness purposes, particularly e-mail (83%), Web sites (70%) and search engines (69%). And at least in the case of e-mail, those marketers say it’s almost as effective for branding as direct mail (70.8% effective versus 71.8% for DM.) Outsell found that 58.6% of those using informational Web sites for branding said they were effective, and 57.9% of those using search engine marketing for branding said the same.

What makes this finding interesting is that a good portion of the advertisers polled by Outsell were small companies, not usually thought to be interested in branding through ads. While 15% of the sample were advertisers from companies with annual revenue of $1 billion or more, 35% had annual revenue under $10 million, and about half said their yearly ad budgets are $100,000 or less. In a group with those characteristics, 80% doing online branding is a strong showing.

Of course, it may be that some advertisers have as loose a definition of “branding” as they do for “online ads”. To some, simply having a Web site may constitute branding, getting their name, logo and product in front of the public. And given that the impact of branding ads is notoriously hard to measure, it may be right to question how accurate their assessment of branding effectiveness can be.

Richard thinks the branding effect may have something to do with the economics of search marketing. “On any search engine, no matter what keyword you enter, you’re likely to find eBay in the top paid search ads,” he says. “Doesn’t matter if you’re searching on ‘Bill Clinton”; you’ll see ‘Bid on Bill Clinton at eBay.’ When you ask them why they do that, they say, ‘It’s branding. We want eBay to show up on every page that everyone looks at.’ They don’t care if you click or not. It’s pay-per-click, so if no one clicks on it, it’s advertising they don’t have to pay for.”

Online ad spending will grow in 2006. Study respondents told Outsell they will increase their Internet marketing budgets to 18.2% of their total spend—a 19% increase from the 16.2% they said they spent online in 2005. That’s eight times the projected 1.8% increase broadcast ad budgets will see this year and six times the expected 3.3% rise in print ads, Richard says.

That money will come from more traditional marketing channels, particularly broadcast (down to 30.6% of budgets this year, from 31.9% last year) and print (down to 28.5% in 2006, from 29.2%).

Search engines will get most of that new online spend, according to the survey. Outsell expects a 26% increase in spending on search marketing this year, compared to an 18% budget increase for company Web sites and a 16% boost in the e-mail marketing spend.

Another interesting sidelight of the Outsell survey is the finding that some of the strongest spending increases for online marketing in 2006 will come in Webinars (25%), wireless ads (19%) and blog marketing (a whopping 43%). Richard cautions that all these increases are on very small 2005 spending bases: A 43% boost in spending on blog ads, for example, will bring that line item up to about 2.5% of the total online ad budget. Still, “the results show some willingness to experiment,” he says. “If all the marketers were just standing around on the sidelines waiting for these channels to catch on, we wouldn’t see any planned increases at all.”

Since advertisers seem to be shifting their spending to measurable online ad modes, Outsell also asked marketers which performance-based online ad types they use, and how they rated the effectiveness of each method. While respondents ran ads related to search keywords somewhat more than either contextual or behavioral ads, they said the keyword ads were much more effective overall. A median 55.7% said keyword ads were extremely or somewhat effective, while a median 40.6% said the same for contextual ads and 44.2% said so for behavioral.

Those effectiveness ratings went way up when respondents were asked about paid listings on specific engines. For example, 70.9% of Google users said their paid search ads were effective, compared to 61.6% of Yahoo! users, 46.1% of MSN users and 40.4% of those using other engines. By contrast, 46.8% called Google’s contextual ads effective, and 40.1% said the same for Yahoo!’s contextual product.

“We didn’t ask respondents to define ‘effectiveness’, but you have to assume that if they say they like Google best, that means they’re getting the result they want–conversions,” Richard says. “In that regard, the findings are a pretty strong statement of observed results. Marketers think keyword search works better, and they think Google’s keyword search is more effective than the competition.”

What should Yahoo! and MSN make of that apparent Google endorsement? Well, one clue comes in a breakout of the advertisers doing the endorsing. Those who rated Google “extremely effective” in the Outsell survey had total ad budgets that were 20% smaller than the respondents saying the same good things about Yahoo! and MSN. One possible conclusion from that is that Google is exerting more appeal among small online advertisers.

The reason could be as simple as a slightly smaller minimum bid on Google than on Yahoo!, or it could be a side effect of Google’s ubiquity in the news today, as both a company and a brand name. But Richard points to one other factor related to how Google and its top rivals place their search ads. Unlike Yahoo!, Google uses both advertiser bids and clickthrough rates to pick ads to link with specific keyword searches; ads that don’t get many clicks tend to appear less often. This could affect the perceived effectiveness of Google’s sponsored listings—an impression that then get spread by word of mouth when small business owners talk to one another.

In other words, Google’s business model may have earned it better buzz among small advertisers than its competitors. However that came about, Richard says, Yahoo! and MSN will have to implement countermoves to boost their perceived effectiveness, or resign themselves to permanent also-ran status in the paid-search business.

Finally, are there any lessons in all this online marketing research for Old Media? “Realize that you’re dealing from a position of strength in event marketing, direct mail and trade print ads,” Richard says. “But a mix of methods is essential. The new online methods have proven themselves successful to one of your two primary constituencies, the advertisers. If you’re having internal debates about possibly cannibalizing ad sales, realize that your advertisers are media-blind. They’re just trying to get the best conversion rates and return on investment, and they’ve already flocked to online as well as the traditional methods. So don’t silo yourself off as a print magazine or a direct-mail company. You need that mix, too.”

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