Effects Of The Economy On Advertising

The prevailing economic conditions are having predictable waterfall effects.  Take the case of ad agencies;  their value stream begins, of course, with advertisers.  In times like these, advertisers (in general) do two things -

a) Tighten their belts - they reduce budgets, reduce staff, reduce expense accounts.  Marketing folks generally fly high, compared to many other parts of most companies.  So it is relatively easy to reduce spending on both the advertising expenditure, as well as non-ad related expenditure. 

b) Focus on ROI - traditionally, ROI on ad spend is not easy to measure.  Efforts are continually made to better understand the effects of advertisements, and media channels used to deliver a message.  Everything from immediate buying decisions, deferred buy decisions, perceptions of competitive brands, to brand lift need to be measured and used to refine ad spend.  But ROI on ad spend, to quite an extent, is a black art. 

Consider this - the effects of online advertisements are easier to measure than television or radio ads (with online ads, there are direct actions that can be immediately measured, such as clicks on ads, how long the ads were visible on the page, etc.). 

And in the world of online ads, CPM (cost per thousand impressions) ads have the least immediately measurable ROI, compared to CPC (cost per click) ads, which are second to CPA (cost per action) ads.  Of course, I am assuming that brand lift is not the most important metric here; when brand lift is the metric, you have to look for more esoteric metrics.  But when action is directly required, and ROI is top of mind, CPA ads are the clear winner, followed by CPC ads. 

So what do I think will happen?  Well, first of all, based on the points above, there will be layoffs and budget cuts in all marketing departments, and secondly, ad budgets will be moved to areas and agencies that can promise a deeper focus on ROI.  This of course should imply that print and TV ads will give some ground to online ads.   (see my earlier blog post about some layoffs already announced)

As part of my job at Kosmix, I am already starting to see some of this.

And in online ads, we should see a higher proportion of CPA ads, then CPC ads, both taking away from CPM ads.  This will also drive a slightly less desirable behavior in websites - where CPM ads give a guaranteed revenue for impressions, one needs to drive users to click on CPC ads; and with CPA ads, you have to drive either qualified users (who will end up completing a desirable action on the landing site after clicking on the ad), or send over a lot of users and hope a fair proportion of them complete a required action.  That should make sites less user friendly, unfortunately.