Thursday, January 06, 2005

Half and half-not

The price of key words on places like Overture and Google leaped 24% in the fourth quarter to an average of $1.70 from $1.37, according to Fathom Online, a not-exactly-disinterested company that helps advertisers place such ads.

Though it's not possible for a mere journalism major like me to fathom the algorithm that underlies Fathom's assertion, a double-digit increase of even half that magnitude is a strong vote of confidence in the ability of this $4 billion-a-year medium to deliver measurable, credible results.

For those who have been dozing at a remote mountain retreat for several years, here's how key-word advertising works:

Advertisers bid for the relevant key words that enable their ads to pop up next to a search on Google, Yahoo and similar places. If you look up "Mexico" on Google, for example, you will see ads on the right side of the page for hotels, time shares and -- I am not quite sure of the relevance of this -- "sexy singles."

The more you pay Google or Overture, the higher your ad will appear in the column. If others pay more than you, your ad will not appear at all. The advertiser is charged only when someone clicks on it. If your ad does not generate enough clicks, it is suspended and you are advised to either change it or kill it.

Key-word advertisers get individual web pages to track the success of their programs, click by click. Reconciling clickthroughs to actual sales, advertisers can compare alternative ad programs, adjust inventory levels and so on. This takes a lot of the guesswork out of running a business.

Large advertisers are getting more and more sophisticated about key-word, email and other online marketing tactics. Enchanted by the precision possible with such programs, they increasingly are disenchanted with paying big bucks for legacy print and broadcast media, because they can't determine how much mud actually is sticking to the side of the barn.

Legacy media companies still have assets that advertisers find hard to resist: Excellent brand recognition, local market strength and lots of eyeballs. Legacy execs who want to leave a healthy legacy to their shareholders will leverage these strengths by creating appealing new-media (particularly Internet) ad vehicles that satisfy the need for advertisers to know where their money is going.

In the olden days, advertisers would say, "I know half of my ad budget is waste but I don't know which half." So, they kept spending it all. Nowadays, advertisers have a good handle on which half of their advertising is working.

If the legacy companies aren't careful, the half that demonstrably works (not theirs) will keep getting bigger. And the legacy half -- which, I daresay, hasn't seen a 24% quarterly rate increase in many moons -- will dwindle away.


Blogger John V said...

One correction: "The more you pay Google or Overture, the higher your ad will appear in the column" is not exactly accurate.

It is true for Yahoo, which lists ads strictly on the basis of price paid, highest price on top.

Google, however, uses an algorithm that blends price paid with clickthrough rate. They feel this improves user experience: If an ad gets vastly higher clickthrough, it must be more "useful" to users than others, so they balance out the two factors.

And I have to say I agree with them.

10:18 AM  

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