The two tasks for online ads

This year Facebook is 15 and Google is 21, but as advertising channels for big brands, neither has emerged from the troublesome teenage phase into a fully effective adulthood.

It’s because marketers are often not using these and other online channels appropriately: Online ads perform two distinct tasks that need two different decision-making processes, but many marketing departments only use one.

The first task is the one that marketers are most comfortable with because it is the same task that’s done by offline ads. If seeing a compelling picture on Facebook is similar to seeing a poster on the street, and watching a video on YouTube is similar to watching one on TV, then it’s clear, an online ad is just like an offline one. It’s an investment into generating demand and producing future sales.

The second task is less familiar to marketers, albeit equally important for sales, it’s the role of online ads as signposts for e-commerce businesses. This task is the online equivalent of the name above the high street front door, the lights that stay on inside, the shelf-space, and even the entry in the yellow pages. The task is to help people who are already on their way to a business website to arrive safely, it isn’t an investment into future sales, but a cost of current transactions.

The two tasks can lead to flawed decision-making when ads that mainly perform the second task are treated as if they perform the first. It can lead businesses treat signposts as if they were substitutes for true investments into future sales and, in some cases, waste money shepherding sales that were going to arrive anyway.

Making sense of the macro data

The existence of the second task explains the matching trajectories in the chart below. In it, online advertising’s share of budgets (black line) and the e-commerce share of retail (grey bars) have been growing in parallel for as far back as the data is available. At least part of the explanation is that some online advertising is a cost of carrying out e-commerce. Businesses that want to sell on the internet need to be visible there.

Source: GroupM, ONS

Ah, but correlation is not causation, a sceptic might argue. The chart fits other explanations too. For example, both e-commerce and online advertising rely on the same technologies, so of course they grow together. Or perhaps e-commerce and online advertising are both superior to their offline versions and people have simply begun to use them both more over time.

These alternative arguments break down in the reaction to Covid 19. So far this year, both e-commerce percent and online advertising percent have increased in lockstep at a time when decision-making has clearly been about keeping businesses going rather than making bets on new technologies.

The reason is that during Covid 19, decisions about the two tasks of online advertising have been different. Offline budgets have fallen because, as is typical in a recession, businesses find it hard to invest into future sales when survival today is under threat. But, as the chart below shows, many types of online advertising are enjoying maintained or even increased budgets.

Source: Linkedin survey in June 2020

Some of this change in the media mix is driven by lockdowns and reduced available reach from channels like out of home and events, but some is also because more and more people are shopping online, and that makes the second task more important.

In a recession, businesses cut down on advertising, but they don’t close the shop. They keep the lights on offline, and they remain visible online too.

Counting everyone that walks past the signpost

More important for marketers’ day to day decision making is the way that the two tasks manifest in decision making tools. My team and I use charts like the one below to help make things clearer for clients. It shows the case of search engine marketing carried out by a semi-fictional but typical advertiser.

In the chart, the proportion of total sales driven by search ads is around three times bigger in Google’s attribution tool than it is in our econometric modelling. The reason is that in two thirds of customer journeys that involve a search click, the ad didn’t actually generate the sale, it acted as a signpost, helping someone who had already made their decision to complete their purchase.

Some more sophisticated advertisers are aware of this distinction, but others treat all of the signposted sales as if they were generated by the signpost rather than the price cut, TV ad, or good weather day that prompted the customer decision. They calculate return on investment figures that are too high, and costs per acquisition that are too cheap, and they believe, sometimes wrongly, that switching off signposting would be disastrous.

Using signposts properly

We advise clients to make the comparison above for all online channels, and test limited switch-offs. The test and learn should be focussed on ads that mainly perform the signposting task rather than the demand building task, so that they don’t damage incremental sales, but do reveal how important each signpost actually is.

There is still a lot to learn in this area, but the above chart is typical of our limited experience. The online ads that are most often an investment into future sales are those that target new rather than existing customers and reach rather than engagement. They typically have richer creative, particularly video, and they highlight newer or less well-known products. At the other end of the scale we typically see text only ads for the advertiser’s own brand, social that targets clicks, and generic search for well-known product lines.

Sometimes the test and learn reveals that the signposting task wasn’t necessary, as in the left panel of the chart below. This advertiser had strong SEO and competitors weren’t buying their own brand terms. Switching off core brand PPC didn’t affect sales at all.

In other cases, the signposting job is revealed to be critical. In the right panel, the switch-off revealed that without a presence in generic search for these keywords, even a customer who had already decided to buy could be diverted and fail to arrive safely.

In our past projects, this kind of guided test and learn has helped clients to use their online channels more effectively and avoid wastage in the performance budget. It’s also generated an additional return on investment benefit when advertisers re-invest the money saved into their best performing demand generating channels.

It’s the best that current adtech and econometrics can do, but it’s still quite clumsy. Trial and error is rarely the best way to make plans.

The future is in collaboration between marketers, analysts, and other departments in the advertiser’s organisation. Experts in sales channel management and merchandising have the craft skills to make decisions about spending on physical signposts, call centres, and high street shops. Their expertise must be relevant here.

Time will tell, but my bet is that the fully mature, fully effective role for big brands’ online advertising will be very different to the adolescent one we are familiar with today.