Commentary

More Targeted Ad Dollars Less Profitable

by Jack Loechner , Staff Writer, January 12, 2010

According to a new study from the MIT Sloan School of Management, Online advertising can be much better at targeting certain demographics than its traditional media counterparts, but as more competition enters the space, these advantages do not automatically translate into greater profits. Sloan Assistant Professor Alessandro Bonatti writes that the same search and other technology that has enabled advertisers to target particular audiences, such as men between 25 and 35 years old who work on Macintosh computers, is also creating greater on-line competition for the same audience, thus reducing the profitability of advertising on any targeted web site.

Bonatti, working with Yale University economics professor Dirk Bergemann on this research, says "... newspapers have a very limited ability to target audiences... specialized magazines can do better... Google has a very good ability to target who's browsing each page... (though) online advertising has the potential to drive out traditional advertising, it does not necessarily follow that online advertisers will make more money... "

Bonatti continues, "...as technology keeps improving, more and more web sites can sell very narrow products to very specialized audiences... with lots of people targeting the same audience the profits to be made through specialized advertising become more and more spread out... instead of competing for one large pool... you will have price war in each targeted segment as the slice gets more and more narrow."

Bonatti concludes that, "... the better the technology, the lower the profits for advertisers... "

And MarketingVox data suggest that Bonatti's findings take on greater relevance as vertical and hyper vertical ad networks continue to proliferate. Recent statistics and funding projects are a continued testament to the strong momentum of vertical ad networks' industry-specific approach to placing and distributing ads.

According to Adify's Vertical Gauge for Q3, brand advertising CPMs for various verticals continue to rebound from their depressed state in early 2009. Food CPMs are up 91% from the previous quarter, Real Estate CPMs are up 17% from Q2, and another top performing category is Entertainment, where CPMs grew 8% between Q209 and Q309. However, Both automotive and healthy living and lifestyle verticals contracted substantially this past quarter. According to Adify, may be more of a reflection of economic trends than a vertical ad platform strategy.

Vertical Brand Advertising CPMs, 2009
	*CPM ($)*
*Group*	*Q1 '09*	*Q2 '09*	*Q3 '09*
Affluentials	$8.03	$7.71	$7.73
Automotive	17.26	15.53	12.47
Beauty & Fashion	4.30	3.73	3.22
Business	6.01	6.26	5.68
Entertainment	5.76	6.53	7.07
HealthyLiving & Lifestyle	14.36	12.45	10.19
Moms & Parents	8.48	7.90	6.41
Real Estate	2.38	6.49	7.62
Sports	4.94	7.09	5.48
News	11.40	10.50	10.26
Food	1.50	3.63	6.94
Source: Adify Vertical Guage, December 2009

For more information about the study, please visit here.

advertising, online, research, targeting

6 comments about "More Targeted Ad Dollars Less Profitable".

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Claudio Marcus from FreeWheel, January 12, 2010 at 8:58 a.m.
Indeed, the economic laws of supply and demand make it likely that as more advertisers focus on narrowly targeted segments, the related relative costs are likely to increase. However, an emerging opportunity for advertisers targeting multiple consumer segments (with multiple products or multiple messages) is to buy a broader demographic but target the product/message to each relevant segment. This strategy of buying a broader audience but targeting products/messages to their intended segments, could enable efficient media buying while delivering the benefits of targeted ads.
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Jeffrey Fry from Profit Prophet, January 12, 2010 at 10:30 a.m.

It is nice to see that the invisible hand of supply and demand still exists even on the Internet. This is an very eye-opening article on the pitfalls of too many people chasing too few eyeballs and who too much of even a good thing can be spoiled. When everyone is is shooting at the same target, it makes it more difficult to hit it.

Jeff Einstein from The Brothers Einstein, January 12, 2010 at 10:59 a.m.

Our obsession with targeting over the past 15 years has been predicated on pure fantasy. Only on the far side of the looking glass deep down in the rabbit hole would anyone ever expect to make more money by carving their own target audience into smaller and smaller segments and spending more to reach them.

Spending more to target an audience with an ad no one wants and everyone is equipped to avoid in the first place benefits no one except the guys who contribute the least and extract the most, intermediary players like the media agencies, the online networks and the technology vendors. All they do is drive down value and drive content players and publishers right out of business. All under the guise of increased performance. Pure snake oil.

The only way to restore equilibrium (and profit potential) to the commercial media food chain is to slow down, let go of what we know doesn't work, and begin a process of deliberate simplification.

Mike Einstein from the Brothers Einstein, January 12, 2010 at 11:18 a.m.

This is what happens when you hedge your bets and only play defense.

Richard Monihan, January 13, 2010 at 12:48 p.m.

I vote for Captain Obvious.

If something works, it attracts attention and usage, which then invokes the old "Law of Diminishing Returns".

Eventually, the market has to fix itself and revert to the mean.

Sadly, many internet denizens grew up in the environment of "Increasing Returns to Scale" - which exists during the period of early growth - and have forgotten about diminishing returns.

When the Law finally strikes, we're told "the market is broken". Sorry folks....the market works. You just have to understand how it operates. Let it do its job.

Bryan Depew from ImpactEngine.com, January 13, 2010 at 1:14 p.m.

Also important to note that as the demand (and CPMs) for each highly targeted vertical niche continues to increase, this is where publishers will focus their selling efforts - making them less likely to offer low CPM "run of site" and remnant inventory. Eventually, "A rising tide lifts all ships".