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Search Advertising Will Never Kill Online Display Advertising - Why?

Spending on paid search and display ads is evenly split, but don't expect one to eat the other's lunch anytime soon. Here's why.

Awareness --> Consideration --> Preference --> Purchase

Here are a few basic issues to consider when thinking about the purchase funnel verses the advertising inventory that exists in the world. At the opening of the funnel, starting with awareness, there is a vast amount of advertising inventory available, and at a relatively low cost per thousand (CPM) ad impressions. At the end of the funnel, ending with purchase, there is a small amount of ad inventory, and the cost of that inventory is quite high on a CPM basis.

Advertisers also apply two macro methodologies to their advertising spending habits across the entire purchase funnel. They either use direct response approaches to buying ads, or brand approaches to buying ads. To keep it simple, let’s just say that DR advertisers measure to a cost-per-acquisition (a purchase) during the life of the campaign. And let’s call the brand bucket as measuring key performance indicators (KPIs) that are tied to the location and movement of the potential customer through the purchase funnel. This includes elements like brand awareness, brand consideration, brand preference, and some more direct response-like measures like purchase intent.

Large advertisers that spend hundreds of millions, if not billions of dollars annually are also very good at measuring their ROI. You might imagine that if a small percentage of a large budget is spent on measuring advertising effectiveness, they can get pretty comfortable with their return. I’ve heard some consumer products goods companies boast of being able to predict ROI to within a few decimal points of percentage.

While all advertisers will admit that their advertising spend is somewhat inefficient (meaning they don’t exactly know which spend drove which lift), they don’t often talk publicly about their ability to predict results -- as this is highly valuable competitive data. And yet the myth seems to persist that advertisers simply throw spaghetti against the wall and expect half of it to stick -- and therefore are somehow “wasteful” or “unscientific” in their approach to advertising.

The real discussion to have is around how they allocate that spend. Less than 10 percent of all ad dollars spent are allocated to advertising online, and the split between paid search and display ads is pretty even at the aggregate level. Within the display advertising bucket, only a small amount of the total spend is allocated to direct response buying, most dollars are spent on branding.


The above diagram represents inventory as mapped against the purchase funnel (all impressions that exist across all online media could be fit within this triangle) showing the breakdown of buying methodologies (brand and DR) and the relative price paid for the inventory by the advertiser. Note that in the online space, the pointy-end of the funnel is basically paid search advertising. And everything to the left of the vertical dotted line is display advertising, with half of the inventory going to brand advertisers, and half going to DR advertisers.

But note that a proportionally small amount of revenue actually goes against DR spending on display ads. This pool of inventory -- DR display spend -- is made up of inventory sold through contextual networks, display ad networks, and ad exchanges today. The red ball (below) shows revenue from premium brand advertisers -- primarily hand-sold by a human sales force. Over time I predict that we'll see the amount of inventory allocated against DR buyers change as we remove friction from the purchase process by automating the purchase process.


While as a category, paid search will always be high revenue generation per impression (for the search engines), the overall number of impressions that exist are segmented into very small pools of inventory. Each small pool (denoted by a single keyword) tends to be relevant only to a small number of advertisers -- meaning that per advertiser there just isn’t any way to buy very many impressions (even if you’re paying on a cost-per-click).

Keep in mind that while the paid search space boasts more than a half-million advertisers, the display space (across online display and even offline media such as television and print) really is made up of only about 3,000 to 5,000 brands that perform large-scale buys. There is an important take-away from that point. There is not enough inventory in paid search for it to be a large percentage of any one advertiser's budget overall (spreading the entire 4 percent of all spending -- see below -- across hundreds of thousands of advertisers versus online display spreading spend across 3,000 to 5,000 advertisers).

US Ad Spending across media -- 2008

Source: eMarketer (Barclays Capital March 12, 2009) and Eric Picard analysis
*Excludes the Direct Mail and 'Miscellaneous' categories

Paid search simply doesn't have enough viable inventory in any given category to enable any significant advertiser (large spender) to move large portions of their budget to paid search. Take an advertiser who spends $1 billion in the U.S. each year. One could assume that they follow the breakdown that I'm showing as the average in the chart above. However, it is highly unlikely that they are allocating even the 4 percent listed for paid search on this chart out of their total budget. There is simply not enough inventory for them to spend the money on.

People who do not understand advertising in general but do understand the paid search space frequently talk about how all ad dollars will move to paid search over time, "since it is so effective." When you measure your results against CPA during the life of the campaign, very few people will argue against the value of paid search. But when you look at the entire ad spend of a big-budget advertiser, and you look at the myriad KPIs that they use to measure the success of that advertising spend across brand and direct response, it is highly unlikely that paid search will be incredibly important to any one of those advertisers (beyond some retailers ith massive numbers of products they could buy against in an automated fashion, like eBay and Amazon).

Ultimately, paid search matters far more to the search engines than it does to any one advertiser. After all, before you buy a product you have to be aware that it exists, you have to consider whether you need it, you have to weigh your purchase of that product against all the various manufacturers, and then you have to decide where to go and buy it. Paid search certainly can help sell a product if you catch someone further down the purchase funnel, but it takes other methods to get them to that point.

By Eric Picard

About the Author: Eric Picard is the advertising technology advisor to the Advertising Platform Engineering team at Microsoft.

Views: 102

Tags: Internet advertising, Online Display Advertising, Search Advertising, automotive narketing, display advertising, paid search

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Comment by Ralph Paglia on April 10, 2009 at 11:37am
Tad, I agree with you on the GM assessment... But even with other OEM's, if and when their investments into Search Advertising start to approach levels such as network TV, which is proportionally relevant to what we see at the dealer level, you and others will begin to see inventory constraints... I believe there is a need for a balanced approach to marketing and Search Advertising is actually capitalizing on demand that has already been created. There is still a need to create demand for a car company, or dealer's products in the first place.
Comment by Tim Isaac on April 10, 2009 at 11:32am
Good post! I agree with that.
Comment by Tim Isaac on April 10, 2009 at 11:32am
Good post! I agree with that.
Comment by Tad Miller on April 10, 2009 at 6:36am
If your talking about the dealership level, then search inventory is very finite. I work at the OEM level which is obviously a bigger bucket of traffic. My clients are increasing spend and not really seeing huge decline in conversion rates at the national level.

The sad thing is the overspending on irrelevant or un -targeted keywords that don't produce still goes on at this level. GM has been spending way too much - hundred's of millions in Paid Search, and what do they have to show for it...
Comment by Ralph Paglia on April 10, 2009 at 6:23am
Tad, the limitations to search inventory being referenced are VALID and RELEVANT keyword searches within the geotargeted area... Sure, any search advertising supplier can buy a bunch of irrelevant keywords and target outside a dealer's marketing area, but the reality is that there is a finite volume of relevant searches for any product or service from any merchant. One of the ways to increase that inventory, or volume of relevant keyword searches is to advertise... The advertising, if effective, will generate curiosity and interest in a product, or vehicle, which will then be seen in an increased volume of relevant searches. The concept that there are an unlimited number of people somehow searching for your products or business is ludicrous! The reality is that relevant searches are created by consumer interest and that consumer interest has to come from somewhere... One of many sources is to promote your brand, your products and your locations.

I have seen far more situations where the available search advertising budget exceeds the inventory of people already looking for a dealer's product... Than the reverse. Unscrupulous search advertising suppliers will burn through that budget as a means of generating their own income... More conscientious suppliers will assist the dealer in finding ways to increase interest in that dealer's products, and thus increase the volume of relevant searches.
Comment by Tad Miller on April 10, 2009 at 5:57am
I'm reading this article thinking who the heck is writing it. Get to the end and see MSN. Yes the inventory of PPC clicks is limited ON MSN! At their traffic levels this is true. But their PPC traffic levels are about 10% of Google for my big brand clients.

I think there is much more room to grow in the paid search arena than this post professes. There are series differences in scale for MSN vs. Google though. I've been trying to through money at MSN to spend on Paid Search for over 2 years - it can't spend it because it just doesn't have the traffic or market share. But Google continually amazes me with its capacity to grow traffic and not have any serious degradation in conversion rates.

Its a matter of scale, there is a roof to what can be spent, but its much higher than this post would have you believe.

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