May 27, 2010, 12:35 PM

Time to add ads?

Retailers can make money even when site visitors don’t buy, argues HookLogic CEO Jonathan Opdyke.

As I recently shopped online for a gift for my daughter, clicking through various options for toy kitchen sets, I was served ads for diet pills, teeth whitening and mortgages. It gave me pause. Not only were these ads irrelevant to my shopping needs, they simply did not belong in the context of a children’s store. Retail web sites boast just about the best audience a brand could ask for: people who are actively researching and shopping products, practically raising their hands that they are currently in-market. Bricks-and-mortar stores have long recognized this value offline, selling their suppliers premium placement such as end-cap displays, eye-level shelf space and store circular ads.

The untapped opportunity in online retail becomes even clearer when you look at conversion rates. Typically less than 5% of a web site’s shoppers actually transact—but 100% of that traffic is valuable to advertisers since many of those shoppers will go on to buy elsewhere.

The obvious opportunity for online retailers is in selling ads on their sites. So why is it still fairly rare to see advertising in online stores? One reason is fear that advertising will negatively impact conversion rate and brand perception. The truth is it can—when it negatively disrupts the shopping experience or has little relevance to the shopper. Another reason is that online retailers still have an aversion to advertising. Some of this is due to online advertising carrying a distasteful stigma, a product of the gimmicky ads we all see so often.

But it’s also evident that advertising on e-commerce sites can be successful when done well. Working with leading retailers, we’ve proven through extensive testing that relevant advertising appropriately blended with the shopping experience can lead to significantly higher profits without negatively affecting transactions.

Missing out
So when I do see advertising while on retail web sites, why is it so often unrelated to what I am shopping for? Why are advertisers pitching me teeth-whitening products and diet pills on a toy site?

The main reason is capability. Most retail sites don’t view media sales as a core competency, so they don’t invest in the talent and systems to manage effective advertising programs. There are not yet industry statistics on how many online retailers are running ad programs, but it’s clear that many retailers have begun to dip their toes in the water, with limited to modest success.

For example, some retail sites carve out and sell space to ad networks that automatically place third-party banner or text ads on the site, with varying controls around the types of ads that they can show. In general, these ads include links that take users away from the web store and have limited relevance to the shopping experience.

Some are even potentially objectionable (back to my diet pills in a toy store example). It’s clear that today’s ad networks are designed for content publishers, not for retail web sites that require a more holistic advertising experience. Yes, some new money trickles in, but at what cost?

Other retailers have chosen a more organic approach by charging a few top suppliers a fixed rate for banner ads on the home page and top category pages. Such programs are profitable, but also not scalable beyond a small number of advertisers because e-retailers lack systems to manage, track and target the ads. The end result is reminiscent of the early days of digital media before technology existed to automate ad management and enable rich consumer targeting.

Successful programs
Overall, the majority of online retailers are still missing all or most of the potential media opportunity. A handful of retailers have been paving the way, however, by building profitable and scalable media models within their stores. Here are a few of the successful strategies they have employed.

One of the first media strategies online retailers often employ is to integrate relevant display advertising, such as banner ads, into high-traffic site pages. Many sites, including Overstock.com and Walmart.com, have growing display advertising programs. These banner ads usually feature retailers’ suppliers, and the sites place the ads on targeted, high-visibility locations within the site. The ads link to landing pages within the retailer web site that feature rich brand content and a set of promoted products from the supplier.

The execution isn’t so different from an end-cap display or brand department within a bricks-and-mortar store. Vendors often use these placements to announce new product launches or major promotions, in addition to simply taking the opportunity to reinforce their branding.

On the web, Sony Corp., for example, might buy banner ad space with an electronics retailer to announce its new line of Bravia televisions. The ad can link to a Bravia page within the retailer web site, keeping the customer engaged with the retailer. Display media tends to be priced either by CPM (cost per thousand impressions) or by a fixed price for a specified period of time, with rates set based on factors like product category, audience profile and expected traffic.

A second successful strategy is paid product placement, whereby a vendor pays an online retailer to feature or prioritize its products in well-trafficked locations on the site. Some successful product placement programs include Amazon ProductAds and Expedia TravelAds, evidenced by the volume of ads showing on their sites.

This is similar to the concept of paying for eye-level shelf space or a position near checkout lanes in a physical store, recognizing that many customers buy the first product they see rather than digging too deeply (or in the offline case, bending over to look at the bottom shelf).

Vendors see immense value in these types of placements because better positioning gives them an edge over competitors’ products also for sale in the store. The most technologically advanced product placement programs operate with a pay-per-click model, where the advertiser pays for the ad only when a customer clicks to view the promoted product.

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