Can I let you in on digital marketing’s dirty secret?
It’s the one secret that marketing execs guard more closely than any other: Digital ads don’t work nearly as well as they’re advertised to.
More often than not, their effectiveness is wildly and brazenly oversold. Stratospheric conversion rates and returns almost always overvalued by a factor of three and sometimes by as much as a factor of ten or more. Which means, for companies, that instead of the 4,100 percent ROI they thought they were getting, they could actually be getting a negative 63 percent ROI.
These numbers aren’t hypothetical. I’m not pulling them out of thin air. These are the actual overestimates of ad effectiveness found in a large-scale study at eBay. Moreover, eBay is not an outlier. It’s the norm.
Comparing traditional measures to a large experiment measuring the returns on Web display ads on Yahoo!, Randall Lewis and David Reiley found ROI inflation of 300 percent. In a large-scale experiment testing the effectiveness of retargeting ads compared to industry studies, Garrett Johnson, Randall Lewis, and Elmar Nubbemeyer found overestimates up to 1,600 percent. In a study of fifteen large U.S. advertising experiments comprising 500 million user-experiment observations and 1.6 billion ad impressions, Brett Gordon, Florian Zettelmeyer, Neha Bhargava, and Dan Chapsky found that traditional ad effectiveness measures overestimated the lift from Facebook ads by up to 4,000 percent.
The good news for anyone engaged in digital marketing is that some digital and social media messaging is quite effective. But only if you know what you’re looking for. Lift, the behavior change created or caused by persuasive social media messages, is the key. This is a measure of the extent to which an ad, video, or other persuasive message changes people’s behavior. Lift is real and measurable—it’s just not being measured or managed properly.
An experiment by Lewis and Reiley at Yahoo! demonstrated that online display ads profitably increased purchases by 5 percent. It also unmasked two misconceptions about digital advertising.
- 78 percent of the increase in sales came from customers who never clicked on an ad. Which highlights another dirty secret in the marketing industry: clicks are a terrible proxy for conversions. People who click on ads are rarely converted into sales. And people who are converted into sales rarely click on ads. The correlation between clicks and conversions is typically nonexistent.
- 93 percent of the increase in sales occurred in the retailer’s brick-and-mortar stores, rather than through direct responses online. While direct response advertising—clicking through to purchase on an online ad—may be easier to measure, it is an incomplete measure of advertising effectiveness for brands with offline sales channels.
Which brings us to the story of how P&G cut its online marketing budget by $200 million and still increased sales by 8 percent.
At the annual leadership meeting of the Interactive Advertising Bureau (IAB) in 2017, P&G’s chief brand officer, Marc Pritchard, took the stage and delivered an address that the digital marketing industry is still talking about today, several years later.
Speaking in a calm voice, he unleashed a measured, but in its own way scathing, critique of the opacity, deceit, and inefficiency of digital marketing. Pritchard announced an action plan for media transparency and notified the market that, within the year, P&G would no longer do business with partners that did not adopt a common validated viewability standard, transparent media agency contracts, accredited third-party measurement verification, and third-party certified fraud prevention. P&G then put its money where its mouth was and cut its digital marketing budget by $200 million.
Agencies grumbled, and social media analysts were in an uproar. Yet two years later, despite having cut its digital advertising budget so dramatically, P&G delivered 7.5 percent organic sales growth, nearly doubling its industry competitors’. How did it do it? By taking advantage of performance-based digital marketing trends.
- First, P&G shifted its media spend from a focus on frequency—on clicks or views—to one focused on reach, on the number of consumers it touched. Its data had shown that it was previously hitting some of its customers with social media ads ten to twenty times a month. So it reduced the ads’ frequency by 10 percent and shifted those ad dollars to reach new and infrequent customers who were not seeing ads.
- Second, P&G became more sophisticated in targeting the right people. By collecting a vast database of first-party consumer data that contained a billion consumer IDs, it began to reach “very targeted audiences.” For example, it described in its 2019 fourth-quarter earnings call that it was moving from “generic demographic targets like ‘women 18–49’ ” to “smart audiences” like first-time moms and first-time washing machine owners.
- Third, between 2015 and 2019, the company cut its agency roster by 60 percent and rationalized its agency contracts, reporting $750 million of savings in agency and production costs and $400 million of improved cash flow. In 2019 it committed to reducing the number of agencies that remained by another 50 percent in an effort to save an additional $400 million.
The practice of measuring the returns to digital marketing is, in some ways, straightforward. But in other ways it’s deep, arguably even philosophical. At the turn of the twentieth century, John Wanamaker lamented that “half the money I spend on advertising is wasted; the trouble is I don’t know which half.” Now a hundred years later, the tidal wave of granular, individual-level personal data created by online advertising has given us the opportunity to solve Wanamaker’s paradox.
Contributed to Branding Strategy Insider By: Sinan Aral. Excerpted from his book: THE HYPE MACHINE: How Social Media Disrupts Our Elections, Our Economy, and Our Health—and How We Must Adapt Published by Currency, an imprint of Random House, a division of Penguin Random House LLC. All Rights Reserved.
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