Despite the increasing ability to deliver highly targeted marketing messages, the online advertising market will never, ever command premium rates.
We love that our clients are able to put analytics to work with campaigns in the online world that take advantage of increasingly sophisticated targeting capabilities and highly segmented audiences. But it's astonishing to hear the never ending lament from the online publishing side that rates are low and ad buyers just don't place a high-enough value on their product. The inescapable implication is that the marketers and media buyers just don't get it; that they're somehow not bright enough to see what targeting can do.
I'm sympathetic to being passionate about the value one brings to the table, but I think the ones who don't "get it" are those that believe buyers who are getting a great product at a low price are dim witted.
An Ad Age report this morning, Online CPM Prices Take Tumble, continues to attribute ever falling online CPMs to confusion about the superior value of the product. Here's the analysis, in brief:
Problem:
- CPM rates are in the basement, below $1 for remnant inventory.
- Sell through rates are so low, around 30% for some online publishers, that remnant inventory pricing is driving the market.
Diagnosis:
- Marketers who have become accostomed to using the web for high-volume, low-yield campaigns never developed the sophistication to take advantage of the better targeting that can generate higher yields.
- Too few publishers have the discipline to "stand up for themselves", sell to the value, and hold the line on pricing.
Solution:
- Better educate buyers about the superior value of highly segmented audiences and ever-better-targeted impressions.
- Be more disciplined about pricing, and refuse to give away inventory below its true value.
This analysis might hold water if not for the most critical characteristic of this industry: nearly unlimited supply at a marginal cost of effectively zero.
The funny thing is the author, Abbey Klaasen, sees the problem, but never goes anywhere with it:
Now it's hard to fault the reporter as she's only echoing what so many of the experts in the industry have been saying for years.
What has convinced me that this industry will never see the promised land of premium CPMs is comparing it to another industry with which it shares important characteristics -- the airline industry.
Both are characterized by:
- Low barriers to entry,
- High non-financial returns,
- Low variable costs, and
- Perishable inventory.
For the airline industry, this has resulted in a near-permanent state of distress, frequent bankruptcies, and a net loss position for the industry as a whole since its inception.
Let's quickly look at the parallels.
First, both have very low barriers to entry. For online publishing, any individual with time on his hands can start adding thousands, sometimes millions, of page views to industry supply. Remarkably, the same is true for airlines, as demonstrated by the litany of airlines that have come and gone over time. Anyone with a modest amount of capital can lease an aircraft and some gates at a few airports and plug into the computer reservations systems.
Next, both are characterized by high non-financial returns. By this I mean that people will get involved in both for reasons that have nothing to do with making money. The airline industry is sexy and has been plagued by people who will work in it and finance it because it's all about exotic destinations and big, cool toys (the aircraft). Publishing continues to attract millions of content creators, big and small, because the attractions of being heard, recognized, and influential are immense. As noted in the Ad Age article, social networking sites and other big publishers, in search of more volume at a low-variable cost, have facilitated the creation of billions of new impressions by the masses. Combined with low barriers to entry, this means that supply will continue to flood these industries even if the chances of making good returns are remote.
Lastly, variable costs are almost zero and the inventory is perishable. So, unless you are fully booked, which is extremely unlikely given the first two factors, you will be willing to almost give away your inventory before that plane takes off or the page is viewed.
In the early 1990s, Bob Crandall at American was popularizing a similar diagnosis of his industry's travails as that offered by today's online publishers. He said what was needed was pricing discipline and tried to lead the industry with a new fare structure that eliminated cut-rate pricing on the margin (see this New York times article for a description of his plan). But he was never able to control the massive economic pressures that kept the airlines in near-permanent discounting mode.
It may be a tough pill to swallow, but online publishers are never going to save themselves by educating buyers to pay more for something that, like tap water, is very valuable but even more abundant.
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