INTERNET ADVERTISING: THE NEW FRONTIER IN
MARKETING FOR THE 21ST CENTURY
Independent Research Project conducted by Russell D. Klein, Candidate
for MBA at the University of Michigan Business School. Project performed under the
supervision of Professor Thomas C. Kinnear. Published December 18, 1998.
Executive Summary
Background
Internet use has soared during the past four years. The World Wide Web will soon affect nearly every aspect of our lives. Marketers recognize that these trends present them with fantastic opportunities. However, major advertisers have so far been reluctant to commit significant resources to funding Internet advertising campaigns. This research report presents a framework for understanding the issues surrounding online advertising and offers a vision of how forthcoming changes will affect marketing on the Web.
The research for this report was conducted between October and December, 1998. Data was gathered from a variety of newspapers, magazines, technical journals and interviews with industry experts. Empirical evidence was also an important source of information for this report.
Summary
A single Internet advertisement can:
- Notably increase brand awareness
- Provide product information
- Stimulate purchase (online or offline)
- Lead to better customer service
Online advertisements can be very effective even if they do not generate click-through's to the advertiser's Web site.
Selected highlights of the report follow, while the document provides the results in full.
There are many incentives for companies to consider advertising on the Internet.
Internet sales have grown by more than 50% per year since 1995. Online businesses generated $21.8 billion in revenues in 1997, far surpassing most analysts’ predictions.
In addition, the steady decline in network TV ratings has forced advertisers to look for new mediums to promote their products and services. Studies indicate that consumers enjoy the interaction provided by Internet advertisements. The Internet also offers advertisers an unprecedented opportunity to segment their markets into small customer groups because Web sites often cater to much narrower audiences than any other form of media. Finally, online advertising enables companies to collect vast amounts of demographic and purchase behavior data on their customers.
Types of online advertisements:
- Banners
: Banners, the most popular form of Internet ads, are relatively small boxes placed at the top or bottom of web pages. Banners combine text and graphics, both of which are often animated. If a user clicks on a banner ad, she will be transported to the advertiser’s homepage.- Buttons
: Buttons are essentially mini-banners. They often contain logos, and they also link users to the advertiser’s homepage. Banners and buttons account for a combined 58% of total Internet advertising expenditures.- Sponsorships
: This is one of the fastest growing forms of online advertising. Advertisers who use sponsorships pay web sites to attach the advertiser’s name to specific site content. For example, Advil sponsors ESPN.com’s athlete injury update. Sponsorships comprise 37% of advertisements on the Web.- Interstitials
: While interstitial ads only account for 3% of current Internet ad spending, they are quickly gaining in importance. They come in two forms: small windows which ‘pop up’ while you browse web pages, and entire screens that appear when you move between pages. Interstitials can be extremely effective advertising vehicles in certain situations, and I expect them to proliferate as bandwidth (Internet access speed) increases in the next few years.- Other Forms
: There are many other forms on online advertisements, including ads attached to e-mail messages, ads included in e-mail newsletters, targeted e-mails and listings in search engines.Internet advertisements intended to increase Web site traffic make sense for companies that sell goods or services online. They can also be used to leverage the Internet’s potential for relationship marketing.
During the past three years, the primary goal of Internet advertising has been to increase traffic to advertisers’ web sites. Advertisers mainly have used banner advertisements to create hyperlinks to their sites. Most of these sites have been aimed at promoting electronic commerce (Web-based transactions) and providing detailed information about products or services. Online advertisements and e-mail messages can also function as powerful relationship marketing tools by increasing traffic to corporate Web sites.
Brands matter just as much in electronic commerce as they do in traditional business settings.
Brands give Internet users a roadmap to guide them through the vast array of choices which await them on the ‘Net. The fact that the top 10% of all companies engaging in electronic commerce account for more than 90% of all consumer sales on the Web provides evidence of the importance of brands on the Internet. There are two key implications for Internet marketers regarding the importance of brands in electronic commerce. The first is that e-commerce companies need to use advertising to build brand awareness for their products and services. The most natural place for them to advertise is, of course, on other Web sites. The second implication relates to the fact that approximately 90% of Internet users spend their time on fewer than 10% of all existing Web sites. This means that where an online advertisement is placed is one of the most important factors in determining whether or not the ad will be effective. As Internet users spend less time surfing and more time visiting their favorite sites, competition will undoubtedly raise advertising rates on the Web’s most popular destinations.
The click-through rate – the percentage of viewers who click on a given banner – is not always a good measure of an online ad’s effectiveness.
For banner ads intended to increase traffic to a Web site, the click-through rate probably is widely viewed as a good measure of an ad’s success. I agree with this conclusion, with the stipulation that profitability should be used as the ultimate measure of the success of any transaction-oriented, short-term Internet advertising campaign. However, hyper-linking ads to extensive web sites may be unnecessary and even counterproductive in many circumstances. It is not necessary for most consumer packaged goods companies to maintain extensive corporate Web sites because they generally do not sell their products over the Internet and because their products require little consideration prior to purchase. Therefore, there is currently little need for brand companies to direct consumers to their sites through online advertising. Nevertheless, the advertising industry has yet to reach agreement on standards for measuring the effectiveness of consumer brand online ads.
Despite the fact that no consumer packaged goods companies ranked among the top 25 Internet advertisers last year, online advertising presents a fantastic new opportunity for consumer products companies to promote their brands.
The 1997 Internet Advertising Bureau Online Advertising Effectiveness Survey observed a statistically significant 5% average increase in brand awareness (determined by whether or not the consumer is familiar with the brand) across the twelve tested products. This supports the conclusion that banner ads are at least as effective as printed promotions. In addition, the IAB found that online advertising can be stored in consumers’ long-term memory. The 9% average advertising awareness decay rate observed in the study was similar to decay rates associated with television and print advertising.
The lack of standards for measuring the effectiveness of Internet advertisements and concerns over consumer privacy have made major brand advertisers reluctant to shift significant resources from other media to the Web.
Information on the number of distinct visitors who view a particular ad, average length of time spent viewing an ad and viewer demographics can vary widely according to the firm-specific methodology used to measure the effectiveness of the advertising campaign. The wide variety in measurement techniques has led advertisers to question the validity of Internet marketing statistics. Concerns over consumer privacy have also influenced major brand companies' online advertising practices. Numerous consumer advocacy groups have expressed concern that the Internet could enable marketers to dig far deeper into customers’ private lives than ever before. Although the Web offers virtually unlimited creative ways of reaching customers, online marketers are wary of taking actions that could be perceived as violations of consumer privacy. Major advertisers do not want to risk offending customers, so they will likely restrain their Internet marketing activities until better standards for consumer privacy have been established by consumer and industry groups.
Currently, the average cost of reaching 1,000 Internet users is approximately equal to the cost of reaching 1,000 television viewers. However, online advertising rates will likely decline in the next few years as the availability of advertising "space" and the use of interstitial ads increases.
Internet advertising rates are usually quoted in cost per thousand impressions (CPM). An ‘impression’ occurs whenever a user views a Web page containing an advertisement. CPM rates primarily depend on the type of web site selling the advertising space. WebConnect, an Internet marketing firm, estimates that current CPM rates are as follows:
WEB SITE CATEGORY
CPM (Cost per 1,000 viewers)
Women
$42
Travel
$40
Sports
$34
News
$40
Financial
$44
Computing $78 Children $39 Business Executives $65
This chart seems to indicate that web sites targeting niche groups (i.e. business executives) and sites pertaining to goods and services that can be purchased online (i.e. financial services and computing products) command premium advertising rates. However, Internet advertisements may be substantially more cost-effective than TV commercials because Web sites can reach much narrower audiences than most TV stations.
Several key trends will enable the Internet advertising industry to meet or possibly even to exceed $8 billion in online advertising revenues by 2002.
The recent explosion in exclusive advertising rights agreements, such as Bank One's $125 million multi-year deal to become the exclusive provider of banking services on Excite.com, could significantly boost online advertising revenues as major advertisers compete for the marketing rights on the most popular sites. The willingness of Web site publishers to accommodate advertisers’ site design requests may encourage companies that are frustrated by inflexibility in other media to advertise online. The increasing availability of high-speed residential Internet access due to the proliferation of cable modems and xDSL technology will provide an additional incentive for online advertising; higher bandwidth will enable companies to create innovative, multimedia-rich ads. The growth of Web site advertising networks such as DoubleClick and the introduction of Internet appliances will also create vast new opportunities for Internet advertising in the next few years.
Conclusion
The decline in network TV ratings, combined with increased bandwidth and the dramatic growth of electronic commerce, provide powerful incentives for advertisers to promote their goods and services on the Internet. However, major consumer brand companies will probably continue to treat the Internet as an afterthought until marketers can agree on standards for measuring the effectiveness of online ads and can devise policies for addressing legitimate consumer privacy concerns. If these problems are solved, the Internet will likely become the cornerstone of the advertising industry in the 21st Century.