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Wmu Article 7 10 09
Wmu Article 7 10 09
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Wmu Article 7 10 09

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The Paradox of ROI in the Ad Industry

The Paradox of ROI in the Ad Industry

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  • 1. EXECUTIVE VIEWPOINT The Paradox of ROI and Decreased Spending in the Ad Industry Paradox Defined Thrift: Increased savings by individu- A paradox is defined as a statement als will result in reduced saving for the or concept that contains conflicting overall population. ideas. While the statement may seem Other paradoxes exist in the world to be self-contradictory or absurd, in we live in. Some of my favorites include: reality it expresses a possible truth. • We have wider freeways and longer If you’ve read the Wall Street Journal commutes. over the last several months, you may • We have bigger houses and smaller have read an article that referenced families. the economic theory “The Paradox of • In a Windows environment, it is a Thrift.” The theory, authored by econo- paradox that when we want to shut mist John Maynard Keynes, states that down our computers, it is necessary during an economic recession individu- to click “start.” Lance Richard al consumers will increase their savings Sales Director, VP of Sales, at a rate greater than the rate at which Every industry is affected by a para- Monster MediaWorks they normally spend. Paradoxically, the dox. The industry within which I work, aggregate of all consumer savings will the advertising industry, has an intrigu- actually decrease as a result. ing paradox in play that is altering its With closer analysis of the two traditional business model. Lance Richard is regional sales direc- tor for Monster MediaWorks. He directs conflicting concepts in this paradox, the internal sales organization for a this theory actually makes sense. The The Paradox of ROI proprietary network of websites owned first conflicting concept asserts that in the Ad Industry and operated by Monster Worldwide. when a recession hits, it is common This article will focus on a paradox These websites include Monster.com, for individuals to reduce spending that is affecting the advertising in- Military.com, FastWeb.com and Af- and increase savings. Eventually these dustry that I call the Paradox of ROI finityLabs.com. thrifty consumers grow more confi- (Return on Investment). The opposing Prior to joining MediaWorks, Richard dent in their personal economic condi- concepts in this paradox are “Increased held senior positions with Emmis Com- tion and resume spending at the same Advertising Performance” that results munications as director of sales; IP2M pre-recession levels. Assuming that the in “Decreased Spending” on advertis- (a start-up dot.com) as executive VP majority of consumers follow this path, ing. How can it be that when an ad- of sales and strategic marketing; Clear it stands to reason that consumers will vertising solution delivers better results Channel Radio as director of sales and have in effect, pushed the reset button to an advertiser, the advertiser reduces Fox97 Radio as general sales manager. on the economy and thus the recession their ad spending? Richard was a featured speaker at quickly ends. This paradox is worth exploring as it the Radio and Records 2006 conven- The second concept is based on the promises to disrupt an industry that ac- tion and is a member of the Chicago negative effects of increased savings. cording to eMarketer generated $269 Interactive Marketing Association and When a significant percentage of the billion in annual sales in 2008. This in- the i612 digital media organization in general population saves more than dustry employs thousands and touches Minneapolis. they consume, the result is a slowdown every part of society including televi- in overall consumer demand, increased sion, radio, movies, music, professional Monster MediaWorks connects product inventories, and reduced sports, billboards, direct mail, newspa- clients with “fulfillment seekers” via manufacturing. Less manufacturing pers, magazines, cell phones, and hun- innovative products, ground-breaking results in reduced wages and lost jobs. dreds of thousands of websites. ideas, industry-leading customer service Reduced wages and lost jobs translate Since this paradox relates to an and cost-effective solutions that deliver into less household income and as a industry with some unique language, on the clients’ objectives. result savings for the entire population it might be beneficial to review com- actually decreases. Thus the Paradox of monly used terms and phrases: Fall 2009 • Vol. 24, No. 2 11
  • 2. Richard Advertising Agency: A company hired party service. Advertisers are in often at the top of the list. As an in- by an advertiser to act as an agent on turn charged a fee for each unique tangible product, managers often find its behalf to develop and execute ad- ad delivered. it easier to cut an advertising budget vertising campaigns. versus an employee. However, advertising is an impor- Ad Medium: A business entity that Two Business Concepts tant component of a business model publishes, broadcasts, or disseminates advertising in the normal course of in Conflict as it has a direct influence on sales. its business, including the following: Two conflicting concepts exist with- Customers must be reminded on why 1. Newspapers in the Paradox of ROI as it relates to they need a product, what it costs, and the ad industry. As a basic pillar of capi- where they can buy it. In a weak econ- 2. Magazines talism, ROI is a driving force behind omy, smart business leaders continue 3. Radio and television networks product innovation. Advertisers seek to advertise but will seek ways to do it and stations out ad mediums that will deliver more more efficiently. 4. Cable television systems value for the dollars they spend. In an The last significant recession to hit 5. Websites effort to earn their customers’ business, the U.S. was the recession that cata- Old Media: A general term used to pulted Bill Clinton into his first term describe ad mediums that rely on a ad mediums constantly seek to improve their products. Ad mediums that are as President. The advertising landscape “one-message-to-many” ad delivery during that recession was populated model. Old media includes: news- successful in improving results are re- with ad mediums collectively referred papers, magazines, radio, television, warded with increased sales and reve- to as old media. In 1990 there were just direct mail, and billboards. nue, all based on their advertisers’ ROI. three major television networks (ABC, The number and availability of ad Online Media: A general term used NBC and CBS). Cable television was media in the industry has increased sig- to describe an ad medium delivered just starting to gain traction. Major nificantly over the last ten years. One newspapers still dominated local media through the internet that utilizes a new medium that has had a significant in every major market. Radio was the “one-to-one” ad delivery model. On- impact on the ad industry is online me- only vehicle for teenagers to discover line media includes search engine dia. With online media’s ability to ac- new music. The Internet was relatively portals like Google and websites like curately track the delivery and response unknown, and the founders of Google MSNBC and ESPN. of ad campaigns, it has significantly in- were still in high school. Advertisers Nielsen TV Ratings: A survey estimate creased ROI for its advertisers. of television viewing conducted by that cut back during this recession did The second conflicting concept so evenly across all of their old media the Nielsen Media Research Com- in the Paradox of ROI is “Reduced partners. For the most part, advertising pany. TV viewing estimates are used Spending”. As the perception of im- companies survived that recession. to establish the number of consumers proved ROI has increased, advertisers As the economy of the early 1990s exposed to a television commercial are realizing that they are able to spend turned from recession to recovery, ad- and to establish value and pricing. less while maintaining the current ef- vertisers ramped up their spending, Arbitron Radio Ratings: A survey esti- fectiveness of their marketing efforts. bought more ads, and cast their nets mate of radio listening conducted by According to media research compa- even wider. This happened in spite of the research company Arbitron, Inc. ny, eMarketer, growth in total ad spend- the fact that vendors and customers Radio listening estimates are used by ing in the U.S. dropped by 3.6 percent in knew that a significant amount of the advertisers to determine the num- 2008. While this slowdown in growth is dollars placed in old media would be ber of consumers exposed to a radio directly related to the current economy, wasted on consumers highly unlikely commercial and to establish value many industry experts believe that an to purchase their products. Advertis- and pricing. increase in ROI is at work in driving ers at that time simply had no other Scarborough Research: A survey esti- down total advertising spending. option. The number of media options mate of newspaper readership con- Thus the Paradox of ROI: Im- was limited due to very high barriers ducted by the research company proved ROI will result in less revenue to entry that existed in almost all of the Scarborough. The estimated reader- growth for the ad industry. mediums that made up old media. ship is used to establish the value and In the current recession, the adver- cost of advertising line rates. tising landscape is much different. Ac- Online Ad Impression: The delivery of A Different Kind cording to Nielsen Research, in 2009 a single ad on a website to a single of Recession the average number of television chan- user. Each ad impression viewed by When business leaders look for nels that each U.S. home receives has each consumer is tallied by a third places to cut expenses, ad budgets are reached a record high of 118. The new 12 Fall 2009 • Vol. 24, No. 2
  • 3. Richard Kindle e-reader allows users to digitally ing dollars and reduced media budgets ready seen newspapers in Denver download an almost unlimited number have hit old media companies the hard- and Seattle shut down their print of newspapers, magazines and books. est. With reduced demand for their editions. Several other newspapers And finally, Websiteoptimization.com advertising solutions, these old media are reported to be close to bank- announced that in March 2009 broad- companies are being forced to reduce ruptcy. As these publications fail, band penetration among active Internet prices in order to survive. Advertisers are the dollars they were capturing will users in U.S. homes is slightly more taking advantage of this opportunity by flow back into the market. A signif- than 93 percent. reducing their spending further as they icant share of these dollars will go Cable television has facilitated the come to the conclusion that they can to online media. creation and financial success of many effectively reach the same amount of 4. Online content is improving and new channels such as ESPN, HGTV, potential consumers for much less. This audiences are growing. As more and AMC.The Internet has made it pos- downward spiral in pricing will further dollars shift to online media, more sible for entrepreneurs like the founders reduce revenue and profits for old me- investment will be placed in the of YouTube to start a billion dollar on- dia companies resulting in reduced staff, development of new and innova- line media company with a $50,000 line services, and most of all investment in tive online content and applications of credit from VISA. Lower barriers to product improvements. Without in- (like movies and television shows entry have facilitated a surge in available vestment in their products, old media streamed live and/or on-demand ad mediums, which translates into more will violate their customers’ expecta- onto your Apple iPhone). Advertis- choices, more inventory, and lower costs tions of continuous improvements and ers and their dollars will follow these for advertisers. increased ROI. Many old media com- potential consumers as they increase Online media in particular has be- panies will fall behind healthy competi- the time they spend online. come a game-changer for the ad in- tors and will find it difficult to survive in dustry. Today’s consumer has complete the long-term. Revenue Will Return control of what information he wants On the flip side, online media will The ad industry as a whole will con- to consume and when he wants to find their futures more promising as tinue to evolve over the next several consume it. The connection between they benefit from the shift in dollars years. As advertisers rebalance their the media and consumers has changed from old media. I believe this shift will media mixes, shifting dollars away from a one-to-many relationship into accelerate due to the following factors: from higher priced underperforming a one-to-one connection. This one-to- 1. The economy will only improve old media ad placements, demand will one ad delivery model allows advertis- slightly over the next eighteen eventually catch up with supply. The ers to narrowly target their messages months. In a speech on May 6, timing of this switch in the demand to consumers who are more likely to 2009, Federal Reserve Chairman curve is anybody’s guess. purchase their products. From an ROI Ben Bernanke predicted “economic perspective, online media provides ad- growth would be slow and that vertisers with an ad medium that is able unemployment would continue to Survival and to significantly reduce media waste. rise…perhaps peaking at just under Growth Strategies 10 percent early next year.” A slow Owners of old media properties recovery means that advertisers will (television, radio, magazines, newspa- The Ad Industry continue to look for improved ef- pers, etc.) are faced with the difficult Has Changed Forever ficiencies in their media spending task of mapping out a survival strategy Based on a study released by eMarket- and will continue to shift ad dollars in the midst of an industry in transi- er in April 2009, total U.S. ad spending into online media. tion and an economy in recession. The declined by 3.6 percent in 2008. Online 2. Prices for online ads will not increase bad news is that there isn’t an obvious media’s share of total U.S. ad spending and will likely decrease. With a low path. The good news is that there is a grew from 7.6 percent in 2007 to 8.7 barrier to entry and an increase in path to be found. percent in 2008, and is expected to grow ad dollars shifting to online media, For old media to survive, they must to 9.9 percent in 2009. The projected we will see new websites and addi- start by asking these four fundamental shift in total ad dollars from old media tional ad inventory coming into the questions: to online media from 2008 to 2009 is ex- marketplace. The increase in supply 1. Are old media companies deliver- pected to be in excess of $1.1 billion. This will be greater than the increase in ing their content to their readers/ shift is directly related to online media’s demand. The result will likely be re- viewers/listeners in the format that ability to deliver a stronger ROI. duced prices on ad units. they want? If not, are they willing The ad industry as a whole has been 3. Many old media companies will go to adapt? hit hard by the current recession. Shift- out of business. In 2009, we’ve al- 2. Do old media companies connect Fall 2009 • Vol. 24, No. 2 13
  • 4. Richard with their readers/viewers/listeners on a one-to-one basis? If not, are they willing to start the conversa- tion? 3. Are old media companies willing mIdweSt ASSoCIAtIon for to invest in new technologies, new products, and the human capital that will help them forge ahead? InformAtIon SyStemS 4. Finally, do old media companies 5 Annual Conference th have the right people creating a path forward in a changing business landscape? If not, are they willing to search out those that can? May 20-21, 2010 As media companies ask these questions, they must remember that Minnesota state University Moorhead consumer expectations of media have About 100 participants are expected to attend from the Midwest USA, changed. Today’s consumers of media Canada, and beyond. The conference will provide an intimate environment to believe that they have the right to get facilitate the sharing of ideas through research presentations, work in prog- what they want and when they want ress, doctoral consortium, networking, etc. it. Advertisers have similar expecta- tions in that they believe they have the right to deliver a message to the right consumer at the right time….at a de- ConferenCe SIte CALL for PAPerS creased cost. The answers to the above Minnesota State University Moorhead The annual MWAIS conference questions must deliver on these new 1104 7th Ave. South will accept papers on the state- expectations. Moorhead, MN 56563 of-the-art pedagogy, research, and service across the Midwest. (ph) 1-800-593-7246 Papers are peer-reviewed and Summary will appear in the conference The Paradox of ROI can be applied ABoUt moorHeAd, mInneSotA proceedings. to almost any industry. Customers will always demand a better product… a Moorhead is located in the heart of red river valley of Great Plains region, the ComPLete GUIdeLIneS better solution… a new and innova- conference location, in its close proxim- Visit www.mwais.org tive way to conduct business. As scary ity to some of the beautiful lake areas of as it may be for company leaders to Minnesota, provides easy driving access consider, they must embrace a culture for any outdoor attractions. Conference Co-Chair that encourages employees to attack ashish Gupta, Minnesota State and improve existing processes and University Moorhead products. ABoUt mwAIS Companies that strive to constantly We serve the needs of information tech- Program Co-Chairs nology thought leaders in Illinois, Indiana, Craig vanslyke, Saint Louis improve are the ones most likely to sur- Iowa, Kansas, Michigan, Minnesota, University vive when industries shift, customer de- Missouri, Nebraska, North Dakota, Ohio, mands change, and economies falter. South Dakota and Wisconsin. For infor- harrison McKnight, Michigan mation about membership, contact Matt State University Germonprez at germonr@uwec.edu. Local Arrangments Chair han Li, Minnesota State Univer- sity Moorhead Academic Keynote Speaker vallabh sambamurthy, Michigan State University www.mwais.org www.mnstate.edu 14 Fall 2009 • Vol. 24, No. 2

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