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. 

Advertising Downturn - Microsoft Razorfish Layoffs

Razorfish, which Microsoft acquired as part of last year's $6 Billion aQuantive acquisition, is laying off 40 of its 2,000 staff members.  The layoffs are all from their New York office, which has lost quite a few clients in the recent economic downturn. 

At the same time, Razorfish is looking to expand its presence in Europe, and is buying Wysiwyg, one of Spain's largest online ad agencies. 

Add to these two the rumors that Microsoft is looking to sell off Razorfish (which used to be Avenue A/ Razorfish before a recent rebranding), and you have an enigma wrapped in a conundrum. 

The rumors around Razorfish's potential sale have quite a bit of meat to them.  Add to them the following facts, that bolster the rumors:

a) Microsoft was really looking to buy aQuantive, in response to Google snapping up DoubleClick.  Razorfish came as part of the package, and didn't really fit with Microsoft's overall strategy. 

b) Microsoft puts almost $250 Million a year into digital advertising.  You read that right!  And they use other agencies, mainly (as far as I know) Universal McCann for a lot of their digital media plans.  Now, if Razorfish was strategically a fit, wouldn't this be different?

c) Razorfish represents a broad spectrum of clients.  But they aren't really selling them on advertising on Microsoft pages front and center.  That stands to reason - without objectivity, Razorfish would not be able to keep their clients for very long.  But then how does it serve Microsoft to keep them around?