A P T White Paper Internet Advertising

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  • 1. Internet Advertising: How Online Ads Can Affect Offline Sales apt Viewpoint Author: Scott Setrakian Managing Director Jonathan Marek Senior Vice President San Francisco Washington, D.C. London www.predictivetechnologies.com
  • 2. abstract Abstract A mother wants to buy a backpack for her child who is starting first grade. She logs onto an Internet search engine (such as Yahoo or Google), and runs a search on the words “child’s backpack. The search engine finds several ” hundred thousand different web pages that contain those words. When the search results are presented, links to several websites are displayed prominently at the top of the page and along the right hand side. These links lead to relevant websites that paid the search engine for the right to appear prominently in front of anyone who searched for certain key words – they are advertising “sponsors. ” The mom clicks through on one of the sponsor websites, finds a backpack that suits her needs, and buys it online. This is the heart of Internet advertising. “Search” and its cousin, “Banner” (display ads posted on targeted websites, such as an ad for backpacks on a website about child raising), represent about 7% of all ad spend today. Search and Banner are widely believed to be rapidly stealing share from more traditional advertising media. Internet advertising is especially attractive to advertisers because the economic proposition 2 is clear for online sales. Click-throughs are automatically recorded for each ad, and resulting sales are directly captured. Calculating ROI becomes a straightforward task, comparing the
  • 3. cost of the ads to the profits from the online sales that result. Measuring the Offline Impact of Online Ads Internet advertisers who do business in both the online and traditional brick-and-mortar store In a typical test, APT partners with a company “Stores in test markets channels have recently started to ask a new set to design and launch an online campaign to a with Search ads had a subset of web users in carefully selected test of questions: Do Search and Banner ads also increase sales in the physical store network? Do markets, while leaving other control markets statistically significant lift customers buy more at a brick-and-mortar store “dark. APT’s Test & Learn Management ” in sales overall, a result after seeing Internet advertising? For example, System then tracks the differences in store might the backpack-seeking mother visit a store sales between the test and control markets, that produced attractive that she saw advertised online, having learned and performs sophisticated analyses to returns to the advertising that the retailer had good candidates, to examine identify the impact that the online advertising the backpack options herself and decide in has on sales in the store network overall. campaign. Sales of both person which one to buy? Might she seek out a APT also identifies differences in performance the advertised product, well-reviewed brand at a local store, so that she doesn’t have to wait for delivery and can have it in that are correlated with different store and market as well as other, more time for the first day of school? characteristics, and different ad elements. The profit generated by the online advertising is “impulse buy” items, The implications of these questions are compared to its cost, creating a true read of increased significantly.” important. If Internet advertising creates the ROI of online advertising offline sales. even more value than the margins driven by incremental online sales, it then represents The initial results are compelling: a more attractive advertising medium than previously thought, and for a larger pool of n Online advertising drives in-store revenue potential advertisers. lift in all instances analyzed to date. For a retailer or consumer goods company that To better understand the offline impact of online sells in both online and offline channels, advertising, Applied Predictive Technologies (APT) the value of Internet advertising is likely is collaborating with selected leading retailers, greater than the value of online lift alone; banks, and consumer goods companies on an “online to offline” Test & LearnTM initiative. n The degree of in-store lift varies from case 3 to case. In some examples, the in-store lift drives attractive returns to the Internet
  • 4. Case Study APT worked with a US-based specialty retailer advertising expense all by itself, without any to analyze the impact of Search advertising profits created by new online sales. This on in-store sales. A Search campaign was means that the Internet can be a profitable implemented in selected markets, and the advertising channel for retailers and consumer change in performance of the stores in those goods companies that sell predominantly test markets was compared to the change through brick-and-mortar networks, regardless in performance of stores in control markets, of the extent of their online presence; where no Search advertising campaign was implemented. The Search campaign was n Advertising ROI often varies market focused on key words relating to a specific by market, leading to opportunities to product line. The retailer was interested in maximize Internet advertising returns understanding what would happen to sales through intelligent targeting; in its stores overall, to sales of the advertised product set, and to other product categories. n Internet advertising ROI varied on the basis of products advertised. These This may sound like a simple analytical task. differences are unique to each advertiser’s However, measuring small changes in sales at concept and merchandise mix; a store is much more complex than measuring changes in click-thrus on a web page. The n Search and Display advertising behave complication is rooted in the nature of store sales. differently, and have different returns; n With the results of carefully Fig. 1: Daily sales at a representative retail store: designed tests, advertisers can exploit opportunities to maximize their Search and Display ROI based on tailoring the message, intensity and ad type. 4
  • 5. Daily sales vary by over 100% in any given week In the case of this specific test, the signal- and by well over 400% seasonally. However, to-noise challenge was exacerbated by a change of only 1.5% in daily store sales can Hurricane Ike, which brought significant drive terrific returns to Internet advertising. winds and rainfall to the middle of the country Accurately detecting a 1.5% change in sales in an during the course of the test, impacting environment where sales change radically on a sales at many test and control stores. daily basis, regardless of the Internet advertising, requires highly specialized protocols of test APT applied sophisticated analytical approaches design, control group selection, and analysis of to mitigate not just daily variations in sales but results. This is known as the “signal-to-noise” also the impact of the weather anomaly, in challenge. order to maximize accurate signal detection. APT’s Test & Learn process (Figure 2), brings The results of the test were important for this highly specialized techniques to bear on the retailer. Stores in test markets with Search problem of reducing noise and finding the ads had a statistically significant lift in sales true attributable impact – the “signal” – of the overall, a result that produced attractive returns activity under examination. to the advertising campaign. Sales of both the advertised product, as well as other, more “impulse buy” items, increased significantly. Fig. 2: APT’s Test & Learn Process 5
  • 6. Ongoing Work The return profile improved dramatically with detailed evaluation of APT is working with a number of retailers to understand differential performance by store. APT identified certain market attributes the impact of online advertising on offline sales. that were associated with proportionately greater sales lifts than the Additional research addresses such questions as: overall average, including trade area per capita income (Figure 3). n Can online advertising replace or enhance weekly newspaper inserts (also known as Free Standing Fig. 3: Inserts (FSI), Weekly Supplements, etc.)? How does Internet advertising ROI compare to FSI ROI - overall, by market, and by week? To address this issue, APT is working with large Sales Lift Index retailers who use FSI to investigate the relative effectiveness of Internet advertising under a variety of combinations of FSI / Internet use; n How does Internet advertising fit into the larger framework of ad media alternatives, including TV, radio and print? To address this issue, APT has collaborated with In other words, stores in trade areas with average per capita income several retail and consumer goods companies to greater than $33,000 saw sales increase 4% when Internet advertising design and execute experiments that evaluate was underway. The Test & Learn approach provided the retailer with a Internet advertising as one component of a means of targeting its ongoing search campaigns, investing only in those strategy that incorporates traditional advertising markets that would perform best. As a result, the retailer was able to media, in order to determine which combination scale back advertising costs in low impact markets, while maintaining is most effective. Results to date show that a large majority of the lift, and thus significantly improving ROI. Internet advertising plays a meaningful role in an optimal media plan, when results include Continuing Test & Learn evaluation can continue to build on these findings lift accomplished at the store level. and drive a refined, highly profitable Internet advertising program. 6
  • 7. Concluding Thoughts Scott Setrakian, Managing Director Jonathan Marek, Senior Vice President The emergence and continuing growth of online Mr. Scott Setrakian is Managing Director and co-founder of Applied Predictive Jonathan Marek, a Senior Vice advertising media offers consumer-facing advertisers Technologies (“APT”). Mr. Setrakian President with Applied Predictive the opportunity to improve sales and margins cost- Technologies (APT), leads effectively. The online channel drives sales and profits has over 20 years experience advising many of the world’s largest and most engagements with casual dining, not just for online stores, but for brick-and-mortar quick service restaurant, specialty successful companies. His work focuses locations as well. retail, big box retail, and banking on the development and implementation of strategies and processes that lead to clients. He has helped clients improve Through intelligent testing, marketers can understand significant improvements in profitability performance through better capital the ROI of online advertising across all sales channels. and corporate value. He has led the work strategy, new concept development, Expertly done, testing can also help target online of hundreds of management consultants media optimization, store labor advertising to the best alternative (e.g., search vs. in engagements in over 20 countries on six planning, site selection, and store- banner), the best products, and the best frequency, to continents. based goal setting. maximize the effectiveness of ad spend. Prior to co-founding APT, Mr. Setrakian sat Mr. Marek has ten years of experience For insight into how Internet advertising can drive on the Board of Directors of Oliver Wyman applying quantitative techniques sales for your company, or to learn more about this (formerly Mercer Management Consulting), to critical business issues. Prior to one of the world’s largest general joining APT, he was a Principal at groundbreaking research, please contact APT at management consulting firms. He led the Oliver Wyman (formerly Mercer 703-875-7700 or info@predictivetechnologies.com. firm’s consulting activities in the Energy and Management Consulting), where he Process Industries around the world. advised multi-unit retailers on new business strategy, network planning, About Applied Predictive He currently sits on the Boards of Directors and operational process issues. At Technologies of APT, The Buena Vista Funds, University Mercer, he drove several field-based change efforts with Fortune 500 Games, the San Francisco Zoo and the Saroyan Foundation. companies. He has led engagements Applied Predictive Technologies (APT) is the industry across North America, Latin America, leader in helping large-scale consumer-focused and Europe. Mr. Setrakian holds a MBA from the companies institutionalize a world-class Test & LearnTM Stanford Graduate School of Business. capability. Through the combination of APT’s proprietary Mr. Marek holds a B.S. in He received an AB in Human Biology software and capability-building consulting support, mathematics (with Honors and from Stanford University, where he also APT has helped some of the world’s largest and most Distinction) and an A.B. in philosophy 7 completed the requirements for a degree in successful companies achieve significant bottom- from Stanford University, where he Psychology. line improvement. graduated Phi Beta Kappa.
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