In Digital Shift Ad Dollars ‘Evaporate’

There’s nothing conceptually new about the notion that when marketers (large and small) shift money online they don’t do so in a 1:1 way. A dollar of traditional ad spending doesn’t turn into a dollar of digital advertising. This point was made years ago.

In thinking about this issue I’ve always focused on margins for local sales channels and (newspaper, yellow pages) publishers and the fact that traditional media margins are typically much larger than online.

I was prompted to think about all this again after reading a column in Digiday by Brian Morrissey, which cites a new survey from the Society of Digital Agencies documenting another side to this “evaporation effect.” The survey, of roughly 600 marketers and agencies mostly in the US and Europe, makes two points that may be familiar but are still fairly profound:

–The ad-spending shift to digital “evaporates” 80% of the spend
–Much of digital spending is going into marketing efforts that don’t involve “advertising” per se

Here’s the statement made in the report about the first bullet above:

Monies continue to be shifted from traditional, expensive tactics toward digital— especially earned media — though it’s rarely a one-to-one exchange. More often, a dollar or euro lost from TV and print budgets becomes 20 cents of digital.

The second point is that where brands, agencies and marketers are putting their emphasis online often involves no media buying or advertising. The money is simply going to headcount or services and not to publishers and ad networks.

The survey respondents were larger enterprises but the same observations largely hold true for SMBs. They’re investing in websites, social media, email and SEO and spending less on paid digital media — on “advertising.” While advertising was often the sole focus of marketers offline, it’s just one of several areas of focus in digital.

While everyone wants to rank in search results (SEO) a much smaller group of business owners is interested in paid-search advertising. And while most business owners (50%-70%) now have a Facebook Page very few are buying Facebook Ads.

One obvious conclusion is that the digital publishers (e.g., Google, Twitter, Facebook) are not making money off many of the entities that are using their services. One could describe this as a “free rider” problem. Facebook is arguably the highest-profile example; everyone’s using it but comparatively few are paying.

As I spoke the other day to SinglePlatform CEO Wiley Cerilli I was struck by the fact that companies like his — there are numerous examples — are representative of a “new generation” of services, tools and products that exemplify the findings above. SinglePlatform costs only $495 per year, negligible by comparison to traditional media advertising. But it performs a valuable marketing function (data syndication) with no media buying.

If the market were totally transparent most small business owners would probably be spending much less and emphasizing different things. However they’re time-starved, confused and the market isn’t transparent.

We could look at each category of traditional media and make essentially the same observations as each one confronts the disruption of digital platforms and audience fragmentation and tries to manage the “transition.” In the case of yellow pages publishers, as with others, profits and revenues are still concentrated in the traditional product, even as they emphasize their digital transformation.

Many industry critics explain this purely as a function of “protecting” print or cite the innovator’s dilemma, and so on. While undoubtedly there’s truth in those explanations, the survey and findings discussed above also make clear there’s simply less revenue to be had for these publishers in digital advertising. Dollars “lost” to digital simply “disappear” or get shifted to other initiatives.

These challenges are compounded by the fact that most traditional publishers don’t fully control their own distribution and certainly don’t command the audiences they once did. These are not new points.

In response yellow pages publishers and other traditional media companies catering to SMBs have added services such as website development and social media monitoring to reflect demand in the market but also to “compensate” for the shift in revenues to non-advertising digital marketing services. Even digital-only channel ReachLocal is doing a version of this with its ReachCast product.

As local business owners become more sophisticated over time these trends are likely to accelerate. But because the economics are so different in digital, traditional media companies can only hope to “reclaim” a portion of the dollars “lost” in the migration.

I’d love to hear your thoughts about all this and whether you agree or disagree.

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20 Responses to “In Digital Shift Ad Dollars ‘Evaporate’”

  1. Marketing Day: February 22, 2012 says at

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  2. Building says at

    As much as we would all really like to bury our head in the sand on this issue, it does raise the most fundamental of questions.

    SEO and Social Media are seeing the local advertising revenue fall to zero. Any small business person that knows anything about marketing, networking or creating and communicating with their database of existing customers, will no longer need advertising as we know it.

    What true purpose does local advertising play for local businesses into the future? Is it only a matter of time before all local businesses realise this and stop advertising?

  3. Greg says at

    There is a limited role for awareness-based ads and offers/incentives for local busiensses. 

  4. Brendan says at

    I don’t think Social Media for businesses is the Holy Grail that some make it out to be. There is a natural limitation to the number of businesses that a person is going to connect with on Facebook or Twitter. The latest FB stats show that an average user has about 230 friends, but I have not seen any data around the number of business/brands they like/follow. With 230 friends, there is a lot of noise in one’s News Feed, which makes it difficult for a business/brand to stand out. Furthermore, it is highly unlikely that a business/brand’s update on FB or Twitter occurs at the exact time that a consumer is making their purchase decision, which makes it difficult to really measure the impact of their presence.  
    I have heard rumors of one major consumer facing company (not to be named here) that is considering pulling their FB page because their experience suggests that people don’t actually want to be marketed to on FB. I think this is an interesting topic that should be explored further. We are still in the early innings of Social Media for business, and it will be interesting to see how it plays out in the long-run. 

    As for the ad dollars evaporating, I think that the “digital industry” is really doing itself a disservice by offering so many options for free. As a result, digital companies that want to charge for their service are forced to under price the true value of their service because they need to be competitive with the free “substitute” products that are available. The industry’s low margins are a symptom of failed pricing strategies rather than failed product effectiveness. 

  5. Greg says at

    @Brendan: Agree that social media is not all encompassing. Evidence suggests it’s best for “CRM” and less so for new customer acquisition. But there are case studies that prove to be exceptions.

    Re “free” products. This was the mistake of the newspapers — to offer everything for free and get consumers hooked on free news. FB, Google and others have offered free products as a market entry strategy and it has worked largely. But similarly all the free stuff has conditioned everyone to want free services. There’s also so much competition that higher prices are under pressure from lower-cost rivals at every turn.

  6. Julie Brooks says at

    Greg, thanks for sticking your neck out to be the new media Cassandra, deflating the hype, and just generally being a much-needed party pooper. I’m on vacation in NH with my family. Of the 100’s I’ve spent so far on meals out, not one decision has been driven by paid advertising. I found all the places we’ve eaten on Google maps, Yelp, and Trip Advisor. What would have driven a decision or two would have been if some of the places had actually had a website with hours and menus. That’s why the web design aspect of my business has grown exponentially in the last 3 years – it’s something businesses actually own, as opposed to a FB page.

  7. Greg says at

    @Julie:

    Most of the “action” for SMBs is going to be in the unpaid services arena: sites, SEO, social media monitoring, etc. Money will change hands but most of it won’t go to ads.

  8. Pat Lazure says at

    One of my favorite posts, Greg.  Thank you. 

    Re “free” products.  I disagree that newspapers’ mistake was giving it way free.  They’ve always given the content away for free.  The subscription price that readers are accustomed to paying (approx. 20% of a paper’s total revenue) merely paid for the dead tree, ink, delivery truck, & paper boy distribution costs (also approx. 20%).  What paid for the content?  Ads. 

  9. Greg Sterling says at

    Fair point Pat. My point was that it’s hard to go back and get people to pay for something they were getting for free in the past. It’s being done in isolated cases (NYT).

    Re ads on news sites, they just don’t have the reach or sophistication online to really get the same kinds of money from ads. There was a recent Pew report on this: http://www.journalism.org/analysis_report/digital_advertising_and_news

  10. Building says at

    Its great seeing all of this honesty coming out in the comments.

    Has anyone from any of the big digital marketing companies made a comment yet? Or are they still in denial?

  11. Greg says at

    The report got some coverage in US-based DigiDay but otherwise I haven’t seen it written up elsewhere — other than here. 

  12. Julie Brooks says at

    I mean come on, people. When is the last time you were on the NY Times website and clicked on ANY banner ad whatsoever? Daily deals – a one night stand, not a sustainable revenue stream. Banner ads on news websites – they don’t work, low renewal rate. SMB’s have limited ad budgets and allocate zero dollars toward things which do not deliver tangible performance results. The better Google gets at driving traffic FOR FREE through its local search platform, the more screwed we are.

  13. Fast Friday Five – Top Stories of the Week | relevancemattersdotcom says at

    […] – In Digital Shift Ad Dollars ‘Evaporate,’ By Greg Sterling, […]

  14. Gregory Clay says at

    This is a great article outlining one, if not the key, challenge facing print media companies today. The trend toward digital definitely means a drastic change in the revenue formula, however I am not sure social media and SEO will be able to deliver the type of ROI that print media once did. A recent article by Mashable, revealed that some retailers shut down their Facebook stores, siting the lack of ROI. And, while SEO meets the immediate needs of a small group of people who begin their day searching for products online, SEO advocates often ignore the fact that very few people engage in organic search once they find a website that meets their needs. For example, Julie Brooks found places to eat on Google maps, Yelp, and Trip Advisor, because was on vacation, she did search for an unfamiliar mapping site. Furthermore,
    I doubt if she starts her mornings on Google maps. Marketers realize that people go online in responds to news prompts at a much higher rate than they do to perform organic searches. Superior content is the reason why local news sites have dominated local markets across the country. The promise of compelling content is what brings audiences online time and time again. Brand equity, then, in my opinion is one of the building blocks of the media industry. The revenue challenge boils down to this, in the words of John Paton, “When print dollars become digital dimes…start stacking dimes.” So, figuring out customer retention and new customer aquisition are the next big steps for media companies, the dollars are a foregone conclusion. For more on SEO and print media follow me on Twitter @ PNJMedia.

  15. Greg Sterling says at

    Agree with the brand point. See, e.g., http://marketingland.com/report-paid-search-as-trusted-as-tv-product-placement-ads-6765

  16. Julie Brooks says at

    Greg Clay: you’re right, of course I would not necessarily use Yelp and Google maps when not on vacation. However, here’s a question: why did newspaper advertising work for the local restaurant pre-Internet but not news website advertising? Is it that before, the advertising worked well because there was no other competition as timely? Or is it that none of the offline media worked all that efficiently but there was no competition? My contention is that one simply can’t compare print news and online news as business models. There are simply too many other ways and always will be for consumers to get the info they want about businesses for free.

  17. Gregory Clay says at

    Julie Brook: Super question! Newspaper advertising has worked so well in the past, because there were fewer choices…it’s just that simple. Now print media has a fight on its hands because of the immediacy of digital and the ability to send targeted prompts to loyal or repeat customers-which again underscores online prompts’ superiority over organic search. But, here is my primary point, which was made painfully evident by the coverage of Whitney Houston’s death, the brand equity that newspapers have built up over the years is what keeps consumers returning to their websites again and again. So, it is not a question of price but rather quality and accuracy. People will pay for quality journalism and that is what news media must deliver everyday in order to survive this transition. Find more SEO on Twitter @PNJMedia

  18. Julie Brooks says at

    Okay, Greg, I see your brand and quality but raise you sustainability: how do people pay for this? People want local news. They used to pay for printed newspapers, and then either interacted with the newspapers’ advertisers, or least the advertisers thought they did (no way to know, really), so the advertisers renewed and so on. So now, with local news sites (and I own one) – in order to keep the news coming, either you have to put up a paywall, or sell a lot of advertising. Another problem: your advertisers may well get good results (I’m talking the SMB market here) but you have to pay people to sell the ads, and shoe leather costs money. As long as the web brings some traffic to business websites for free, it exerts downward pressure on prices, to the point where you can’t have both shoe leather and journalists.
    Oy.

  19. Renovations Caloundra says at

    I’d love to quote Julie: “The better Google gets at driving traffic FOR FREE through its local search platform, the more screwed we are.”

    Can we also challenge the concept of “brand” moving forward? In a world where “mass” is dying and “niche” is thriving, do we all still need to associate with brands?

    Greg, even taking yourself as an example, I’m sure that you no longer consider that you need to be part of a brand such as KPMG or Deloitte to be successful. Instead, you can carve out your own niche and be quite successful without spending a cent on marketing. All of that, ironically, in a niche that provides marketing to SMB’s.

  20. Greg says at

    The concept of “brand” is a surrogate for other issues. it’s a symbol of trust, credibility, quality and so on. Those values still count– even if large taditional brands are not as important.

  21. Tim Cohn says at

    I submit Advertising Dematerialization.

  22. Survey: CMOs Decrease Traditional Media, Still Fumbling Digital says at

    […] post parallels the earlier one about dollars “evaporating” in the shift to digital marketing. As budgets migrate the emphasis shifts from paid to so-called “earned […]

  23. Gregory Clay says at

    @Julie Brook WOW! I could never have been that coherent at 3 AM. Just got back from vacation and I being totally disengaged from the rest of the world. Paying for the transition from print to digital will be “the” great challenge moving forward for most companies. How do people pay for this? Frankly, you have to sell alot more ads-four times more. So, the question then becomes how can you sell more ads “cost effectively”? And, that is where I think media companies need to spend the most time. How do companies incorporate elements of inbound marketing into their operations? How can they interface with customers without paying for so much shoe leather. Keep the journalists…that’s where larger more established companies with strong brands hold the advantage. When you have brand equity you can a nurture customer relationship based on past performance…this advantage however will be diminished over time by newer brands. And since there is no shortage of digital inventory at first glance you would assume that prices would adjust downward. That assumption is correct except all digital impressions aren’t created equal. Producing a quality impression is the best way to justify your price and hold your margin.

    So, to @Caloundra’s point, you do have to carve out your niche, however strong brand still will hold the immediate advantage, until you are able to build your own brand equity or you will just “get screwed by Google”. The brands KPMG and Deloitte can open doors for you, just like a Harvard degree can so you can never totally dismiss the value of an extablished brand. Afterall, the whole point of this article assumes brand loyalty exists; otherwise revenue would simply be reduced to zero.

  24. Newspapers Digital First News Summary-03/09/12 | digitalfirstnewspapers says at

    […] In Digital Shift Ad Dollars ‘Evaporate’                                                                                      There’s nothing conceptually new about the notion that when marketers (large and small) shift money online they don’t do so in a 1:1 way.                                                                             […]

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