As most of us know, the cost of advertising online is generally going up. We also know that different modes of advertising generate different conversion rates. We also know that demographics can form a significant element in conversion rates. It’s all rather depressing really; we all looked for transparency and a complete understanding of our advertising streams in this new Internet world but, in reality, it is just not happening in a useful way.
Problem Case Study
We have a client who pays a maximum “cap” on his advertising contract with a major advertising network. The overall spend is pretty substantial and runs to a few million per annum. He is facing increasing pressure on advertising budgets as his “cost per acquisition” is starting to spiral. With the advertising network placing millions of adverts in a blind network, you have to think that there are ways to improve the overall performance; one such way is matching the demographics of the sites used with the ideal demographics of the client. This is a good idea, except that demographics are not that accurate and, in our example case, the client gets over 20% of his business from the “unfavourable” 1/3 of the demographics. By cutting out these “undesirables” he would potentially see a 20% drop in turnover. But then again, these undesirables cost over 3 times as much to convert to customers than the desirables. So, how do you solve this problem?
Lets just break open this can of worms and see what the challenges are:
1. The client uses a blind network to advertise on, and can put a “stop” on poorly performing sites. This would drive down the overall cost of the advertising, the average cost of sale (whatever that means in this context) AND the total sales. So, 2 good things and 1 very bad thing.
2. The client has the problem that 20% of his sales come from undesirables and these cost 3 times as much to convert as desirables. Is this because 2/3rd of this sector are wasters or is it simply a case of requiring a far higher level of investment to get them to become customers?
3. The increasing cost of acquiring undesirables is making it almost impossible to increase the advertising budget to the desirables.
4. Their website converts at a staggeringly good rate (over 10%). Is this high conversion rate needlessly driving up the cost of conversion by having to pay for more undesirables?
5. The client has a Cost Per Acquisition contract with the agency and this contract gives a (broadly) fixed rate of acquisition, regardless of subsequent conversion into sales.
Hopefully you can see the dilemma here. But there are 2 alternative solutions to this:
1. Move the agency contract from CPA to CPS (cost per sale) - this drives the agency to generate not acquisitions but actual sales. This is, classically, a good solution as the agency is then driving at the same end-goal as the client but it has its own set of problems. Shifting the risk of converting acquisitions from the agency to the client means the agency will require a greater return on the investment. It also means that the agency has 100% visibility of the success of the client and therefore needs to be an integral partner and not a supplier; not every agency or client is comfortable with that level of collaboration and it can be potentially open to some “over selling”. It’s a difficult track to walk down but for most clients this is the only option open to them.
2. Provide a different experience for differing traffic streams. In other words make acquisition a far simpler task for visitors that match the demographics and a far tougher task for those that don’t. This gives you the best of both worlds. If a “perfect” visitor arrives at the site it becomes incredibly simple for them to be pushed through the process because a) they are more likely to respond to the sales messages do so and b) they have a far better chance of converting to a sale and so offer greater value to the client. If an “imperfect” visitor arrives at the site the acquisition process is more long-winded so it weeds out the “less than motivated” and also ensures that when the acquisition process is complete the client knows a great deal more about them so can better target the sales messages used in the future.
Makes sense? I thought so. We are going to try this with two clients who spend in excess of £5m on online advertising.
As an aside (sort of), Acorn provide an embedded web-service that could pull one of 50 or so demographic types that exist (according to them) in UK. All you would need is the postcode so for site visitors you know little about can suddenly be seen in a wonderful techicolour clarity on the acquisition of a postcode. We’ll be trying this out as well.