Online Advertising Appears to Be Clicking With Consumers

Although many online retailers have slashed advertising spending to save money, a new survey suggests that online marketing is still effective at luring new customers and building brand loyalty.

The study concluded that online advertising does a good job of drawing the most attentive Web viewers to Internet retailers. It also reports that top Web e-tailers such as Amazon.com, EBay and ZDnet, were both heavy spenders in online advertising and had the strongest correlation between ads and visitors to their sites.

This was based on data from a study of hundreds of Web sites by Media Metrix’s AdRelevance division, in a survey expected to be released today.

But other Web mavens disputed the survey’s results, arguing that the days of heavy advertising spending to simply generate high visitor numbers, or Web hits, are over. More important, they say, are sales and clear roads to profitability.

“If people aren’t buying stuff, it doesn’t matter how many eyeballs or visitors you have,” said David Cooperstein, the director of online retailing research for Forrester, in Cambridge, Mass. “In terms of bang for your buck, [Web] banner ads don’t leave a lasting impression. They’re usually good for specific promotions and not much else.”

Media Metrix’s authors agree that a retailer has to deliver on products and service to succeed, but they contend that attracting visitors is the crucial first step; for no visitors means no potential buyers.

Banner ads, the promotional boxes that appear on many Web pages, make up more than half of all Internet advertising but have recently fallen out of favor among Web pundits. Many other studies have found that the number of people who click on the ads to visit the advertised sites is incredibly small.

Still, that low number can be misleading since it doesn’t take into account the people who are exposed to an ad and might act on that information later, said Marc Ryan, the author of the AdRelevance study.

The study also found that television advertising, including on the 2000 Super Bowl, can be a waste of money because of the high cost of network advertising. The report’s authors contend that although TV ads can generate awareness of a site, they don’t drive traffic. And if a site doesn’t have traffic and sales, a site won’t last long enough to reap the potential benefits.

Total online advertising spending in 1999 was about $4.5 billion, a figure that is expected to dramatically increase during the next several years.

And Jim Nail, a senior analyst with Forrester Research in Cambridge, Mass., contends that online advertising can play an important role in building a Web business.

Even if the click-through rate of banner ads seems low, the real problem is unrealistic expectations, Nail said. Companies often pay too much for the ads and count on them for more than they can possibly deliver. He said the response rate for Web banner ads is more properly compared with responses to conventional catalog marketing.

Banner ads, which can cost about $30 per thousand displays, can have an immediate click-through rate of about 0.5% to the advertised site, Nail said. Although an average Internet retail order is about $75, that level of response still means that companies pay roughly $60 to attract a visitor, Nail said. Worse yet, since only about 2% of visitors to a site buy something, a retailer might actually be paying $300 to bring one paying customer to the Web site.

But if the same ad were to cost $5 per thousand visitors, a retailer would spend about $50 to bring in a paying customer--a much more reasonable proposition.

If that still sounds outrageous, Nail said, it’s because people incorrectly see the Internet as just another retail store, instead of as the direct-marketing tool it more closely resembles. And catalogers, Nail said, assume they will lose money on a customer’s first sale but regain profits over the customer’s lifetime of buying.

“Catalogers know that a purchase isn’t a one-time transaction--it’s a long-term relationship,” Nail said. “From that perspective, the online retailers aren’t doing so badly with these ads.”

Nail acknowledges, however, that online shoppers must be repeat customers to make the model profitable, and it is unclear whether online loyalty will be similar to the loyalty people have to their favorite catalog sellers.

That uncertainty is all the more reason online sellers have to carefully choose their advertising mix, balancing spending between traditional and new media.