Introduction

Internet World in San Jose was a study in contrasts. Organizers were bracing themselves for a drastically pared down show and were trying to put a positive spin on it by calling it Internet World Essentials. Attendance was a mere fraction of what it was in previous years. The exhibit hall could have fit in a good size hotel room, with a meager 29 exhibitors. Internet World Essentials? This was more like Internet World Skeleton! Perhaps it was morbidly appropriate to hold the show in San Jose, where vacant office space still seems to be the number one commodity.

But, amongst the doom and gloom, each of the three keynote speakers painted the Internet in glowing, rose-colored hues. The speakers were DoubleClick’s president, David Rosenblatt, Disney’s Internet Group President Steve Wadsworth and Playboy Enterprise’s president David Zucker. For all three, the message was the same. The time has come for the Internet as a successful and profitable business channel. In David Rosenblatt’s address and in later conversations with him, another theme emerged. The time has come for the Internet, but first it has to capture a bigger percentage of marketing budgets.

In this NetProfit, we’ll look at the promise of online marketing and some of the roadblocks in its way. In the next column, we’ll look more specifically at search and the role it’s playing in the emergence of online.

The Internet is part of our Lives

There’s no disputing that the Internet has completely altered many aspects of our lives. Rosenblatt quoted some eye opening numbers in his address. It was in 1997 that, for the first time, more emails were sent than letters. Last year, 3.9 trillion emails were sent compared to 200 billion pieces of mail. And, every day, there are twice as many product and service searches done on search engines as there are through the yellow pages. In a few years, the Internet is replacing an advertising medium that’s been around for 110 years.

The Internet also plays a huge role in purchasing decisions. There are three phases to the purchasing cycle: Awareness, Consideration and Purchase. It is the last two phases that the Internet has made a dramatic difference in many product and service categories. In a DoubleClick commissioned study of 2,000 consumers, the web was one of the top 3 influencers in almost every category during the consideration phase of the purchase cycle. When it came time to make a purchase, the Internet was the primary driver of buying decisions in the travel industry and was a top three influencer in automotives, prescription drugs, insurance and the food industries.

The Internet has emerged as a major force in helping consumers decide what to buy and where to make that purchase. And, generally speaking, the younger the demographic, the bigger the role the internet plays. The future of marketing is online.

Dollars spent on Media vs The Internet

So, given that, it should be reasonable to assume that bigger and bigger percentages of advertising buys would slotted for online marketing. Not so. Here are US advertising allocations for 2000. Figures shown are in billions of dollars.

Source www.yppa.com

As you can see, the Internet captured just 2% of all advertising budgets. Remember how the Internet had passed the Yellow Pages by? Even so, Yellow Pages still captures a respectable 6.2% of advertising budgets. And things haven’t changed that much in the past 3 years. It’s expected that US online advertising revenues will hit between 8 and 9 billion for 2003. While that marks an impressive increase over 4.3 billion, it’s still a drop in the overall marketing bucket.

The disproportionate distribution of budgets gets even more dramatic as you climb the revenue ladder to the heights of the Fortune 500. Kleenex, for example, devotes 75% of its budget to television, 23% to print, leaving 2% to be split amongst all other channels, of which the Internet is one.

The Internet as an Awareness Medium

If the internet is so powerful an influencer in the purchasing cycle, why hasn’t more budget been allocated to it? DoubleClick’s David Rosenblatt believes it comes down to one factor. The Internet has yet to prove itself in the beginning of the purchasing cycle, as a builder of awareness. And it’s awareness advertising that the big agencies love to produce.

Typically, the majority of awareness or brand building budgets has gone to the passive media that can reach large numbers of potential customers with each impression. In the past, television and forms of print advertising have been the two advertising channels that have received the lion’s share of budget.

Does this make sense? Let’s look at some numbers. A four color full page ad in Sports Illustrated will cost you $203,000 to potentially reach 3,212, 600 readers. That gives you a cost per thousand of $63.19. With television, a 30 second ad on Friends will cost you about $455,000 and put you in front of an audience of 21,700,000 viewers, giving you a cost per thousand of $20.96.  The average cost per thousand rate of online advertising is about $34. Even on raw cost per thousand comparisons, Internet advertising should attract more attention then it does.

But then you have to look at the nature of the medium as well. Studies have shown the level of audience attention for television ads is significantly less than attention for online ads. We’ve also seen awareness and success rates increase dramatically when online advertising takes advantage of rich, interactive media alternatives. Given the interactive nature of online advertising, its effectiveness in building awareness has been shown to be higher than with passive offline media.

DoubleClick’s Take

So, why has online not broken the budget allocation barrier as a brand awareness builder? Again, with the help of DoubleClick’s David Rosenblatt, here are some suggestions.

As we’ve looked at, it’s not a lack of cost effectiveness that’s holding online back. Acquisition costs compare quite favorably, as a study by Shop.org and the Boston Consulting Group showed. From 1999 to 2001, e-tailers found the acquisition costs drop from a high of $71 per customer down to less than $20 as they shifted their budgets from offline to online channels. In traditional marketing, direct mail traditionally has one of the lowest acquisition costs, at about $9.94 per customer. Compare that to an average cost of $2.00 for online banners, and $0.50 for email.

The problem lies not with effectiveness, but with a reluctance to embrace the new online channels. Ultimately, budget allocations are determined at the Fortune 500 level by agencies and media buyers. The decision makers have an established way of doing things, and online doesn’t fit. Here are just a few of the reasons:

• No relevant metrics. Online metrics, although far more timely and ultimately more accurate, don’t mesh well with offline GRP’s and Impressions. It’s not to say that online metrics need to change, they just need to be standardized, become more transparent and be adopted by traditional marketers.
• New Creative Approaches. As the online medium evolves, it required new approaches to creative. Agencies have been slow to adopt the technologies and skill sets required
• E-mail Spam. The entire online advertising industry is being dragged down by the ocean of spam that floods into everyone’s in box. The problem has to be solved.
• Internal Structure of Potential Advertisers. Typically, large organizations have developed new, independent teams to handle online channels. These teams usually operate at arms length from the other marketing activities. Online marketing strategies have to be integrated into the total marketing mix.
• Rapidly changing Industry. There is always natural reluctance to enter an industry where the rules and strategies are being rewritten on a daily basis. Initially, agencies could say they were just waiting for things to settle out. In the past 4 years, it’s become obvious that things will never settle out in online marketing. Change is the one constant on the web.
• Financial. Traditional forms of advertising have evolved to the point where they’re quite lucrative for advertising agencies. In addition to production fees, they typically also retain a commission on the total advertising budget. This agency commission comes from the media outlets, not the advertiser. The online advertising industry, because of the reluctance of agencies, has often gone right to the advertiser and now the agencies are finding themselves cut out of the loop. Agencies have to make money on online before they’ll move significant portions of budget to it.

Coming Soon

In the next NetProfit, we’ll look at Rosenblatt’s suggestions for helping online grab a larger share of the budget, and look at the part search will play in the emergence of online.