How targeted marketing can help online retailers land the big one
By Rick Markley
Casting a net in deep water may be an effective way to catch a lot of fish. But those just looking for marlin will waste a lot of effort throwing the mackerel over board. Learning where the marlin are and how they behave can take the guesswork out of deep-sea fishing. Likewise, Internet retailers who bought banner ads on high-traffic sites are beginning to exchange their nets for poles.
“Eight months ago, you would have a perceived value of a banner ad on a search engine because you knew their traffic,” says Michael Lavoie, vice president of campaign management solutions for Epsilon. Epsilon is a Burlington, Mass.-based consulting firm that helps companies identify the best spots to place advertising. “You didn’t really care if it worked all that well because you were trying to create activity and traffic. All of a sudden money has tightened up. Now, before you put out an ad, you need know to what the return is.”
The average click-through rate for banner ads is about 2%, and the conversion rate far less. “The conversion rates of shoppers through banner ads are not meeting expectations,” Lavoie says. “Banner ads will deliver eyeballs; the question is will they deliver quality eyeballs?”
If banner ads are the net, contextual marketing is the rod and reel. But before retailers can become contextual marketing converts, it is important to know what contextual marketing is and why it is important. Retailers should also know what makes contextual marketing work and what are the barriers to such targeted marketing.
“It brings a particular offer from the store to a customer at a particular time when they have the highest propensity to purchase that product,” says Elaine Rubin, president of consulting firm ekrubin Inc. and chairman of e-retail association Shop.org. Rubin was formerly with iVillage, a pioneer in contextual marketing. Rubin says many parents came to iVillage for advice on toilet training. “Whether they were reading an article, engaged in a chat or a bulletin board discussion, there was a link to children’s potties and books on toilet training,” she says. The in-text links were crude by today’s standards, but it was cutting edge in 1995. “You could click on those links and basically impulse buy,” she says.
Contextual marketing has become more advanced and more dynamic than it was in the buy-link days of 1995. Companies like Merchandising Avenue Inc. offer ads that change with customer habits and content site material.
Making contextual marketing work requires a blend of art and science. “The science comes in by clearly understanding what your customer looks like, not just from a demographic perspective, but what does your best customer look like in terms of spending,” Lavoie says. “Then you have to understand where you are most likely to get that person—that’s where the art and hard work come in.” To get to those best customers, retailers must know which sites the customers are visiting—and why. They also must press the content site operators to clearly define who’s visiting their sites.
The pickax vs. the fingernail
Eric Marcus, vice president, general counsel and director of e-business research and consulting with The Concours Group agrees. “You increase the granularity of market segments down to the point where you are approaching markets of one, then you develop target market campaigns.” The Concours Group is an international technology and business consulting and research firm with headquarters in Kingwood, Texas. Marcus also serves as president of the company’s eBusiness Center of Excellence. Retailers need to gather sufficient demographic information in order to differentiate the market segments, he says. Some retailers will have information warehoused from customers’ previous purchases, or they may have bought data. Successful data warehousing depends on getting the right kind of data, which will differ based on the product and the customer, and having the right tools to mine that data, he says. “I’ve worked with several companies with great data repositories, with tera-bytes (1 trillion) worth of data, but insufficient tools to access it,” Marcus says. “It’s like being in a gold mine, but not having a pick. You can see the gold, but can’t get at it with your fingernails.”
It’s necessary to highlight the most important data and have the technology to send a targeted message to those markets, Marcus says. “You may sell the same thing to a huge market, but you are selling it to each tiny segment in different ways and accentuating different aspects of the benefits,” he says.
For example, Marriott Vacations identified different segments of its hotel customers and tailored its time-share marketing to each segment. It was marketing the same property to the party-loving crowd and the book-loving crowd with different messages, he says. “If you can get the right content to the right person at the right time, you’re providing a service, not just advertising,” Marcus says. “I’ve never heard anyone who’s shopping for a car say ‘I don’t want to see any car ads.’ Contextual ads move to the point of being consultative. Banner ads don’t do that.”
And it’s these billboard-style ads’ inability to deliver results that’s leading experts to recommend retailers incorporate contextual marketing. “We’ve seen click-though rates at precision marketing approaches that are 13% and above,” Marcus says.
Although traditional banner ads bring in more actual dollars than contextual ads, the return on investment is higher with contextual marketing, Lavoie says. Contextual marketing ads cost less and generally have twice the conversion rate of banner ads.
Being nimble
San Diego-based Merchandising Avenue says ads needs to be agile to drive results. The new company is using both computer technology and human intervention to provide fast-changing contextual marketing. Merchandising Avenue ads run on content pages and have revolving pictures of different, content-relevant merchandise. The company employs three merchandisers who match new content with products.
Merchandising Avenue built a proprietary merchandising optimization engine that notifies the merchandisers when a content page is updated. The merchandisers have two screens: one with the content page and another with the merchandise. They then look at the new content and check the merchandise pallet to see what items will best fit; they then load the items to the content page. The entire process takes about 10 minutes. The merchandisers also track which items are selling and replace those that are not.
“We realized the fastest computer is the human brain,” says Michele Killman, Merchandising Avenue’s vice president of marketing. “Instead of trying to do artificial intelligence to perform category matches, we’ve built a system that allows our merchandisers to be pretty quick. Also, there’s no replacing somebody that understands buying trends. That’s why it works. It’s not arbitrary, it’s relevant. You’re getting down to the psychology of why consumers buy certain things.”
Jim Nail, senior analyst with Forrester Research, says being nimble is critical with contextual marketing. To be successful, marketers must think in the short term and pay close attention to the results. “It’s got to be a whole lot more hands-on than banner ads,” he says.
Marketing agility is translating into results for Merchandising Avenue. The click-through rate for some of the sites using its ads is about 14%, Killman says. The men’s magazine, Maxim, is now testing Merchandising Avenue’s system on its site. Merchandising Avenue did a similar project for Maxim this past holiday and had a 27% click-through rate.
More than a nibble
But a click is not the same as a buy. Killman says the company is too new to have solid data on how many of its clicks result in purchases. “The conversion rate depends on the audience and the product, but it’s been pretty significant,” she says. “We feel the people who are clicking through have a high propensity to consume.” The company believes it will deliver an average conversion rate of 10%, she says.
TrailBreaker Inc., Waltham, Mass., offer a reverse approach to contextual marketing, but one that focuses exclusively on conversion. TrailBreaker creates buyers’ guides—which it calls Microsite Funnels—that shoppers can enter while investigating an item. The funnel uses focused content to lead the customer through the purchase.
WorldWideSports.com is using a Microsite Funnel to sell inline skates. When customers look at inline skate pages, a buyer’s guide/expert advice box (the funnel) appears to right of the product page. Those who enter the funnel are asked what type of skater they are and given content based on that response. “Most retailers believe the way to increase the conversion rate is to drive more traffic,” says David Bailey, TrailBreaker’s director of marketing. “We focus on getting the visitor to hit the buy button and keep what they put in their carts.”
This, he says, happens because shoppers get the details they need to be confident in their purchase decision. The conversion rate is 57% higher when the inline skate shoppers use the funnel. That conversion-rate increase is consistent with other TrailBreaker customers, he says.
“The web allows us to make some inferences and direct correlation with behavior,” Lavoie says. “That’s going to play a part in marketing to a small group in such a way that your response rate should be in 50% to 80% range.”
The path to success
For all its rewards, the path to contextual marketing has its obstacles—and cost is one barrier that looms large. “The principal barriers to entry are financial,” Marcus says “It costs a great deal of money to acquire and continue to acquire the data you need to know your customer.” In many cases it costs a lot to separate the relevant data from the data a company already has. “When you have tera-bytes of data, human beings are not going to be able to recognize the patterns to create market segmentation.” This cost may hinder contextual marketing’s popularity, especially for medium-sized and regional retailers that lack the economy of scale of the larger companies, he says.
Rubin agrees. A lot of the technical products have not performed as well as they could have, and many of them were attached to bigger, more costly solutions, she says. “There’s the matter of being able to afford the technology and have it integrate with all the other technology, which can be very costly,” Rubin says. “Booksellers have very large databases that are cross-referenced in many ways. For other retailers, especially those with perishable goods or those that are seasonal, it’s much harder to create a complex cross-referenced database because it changes so frequently.”
Also, retailers need to categorize and catalog their products on an ongoing basis to know which product works well with different types of profiles or content. That is a huge effort, Rubin adds. “That’s been the big disappointment with personalization products—they have the capability, but they have to be programmed appropriately,” she says. “It is often under estimated how costly and time consuming that process can be.”
Demographic data, such as homeownership, number of children and credit cards held, are inexpensive, Lavoie says. However, more specific data, such as financial transaction or credit report data, are costly.
Merchandising Avenue charges retailers about 13% of sales generated by its ads, although the percentages differ from retailer to retailer on a per-click basis depending on a retailer’s technical capabilities. Merchandising Avenue gives 50% of its commission to the content site.
TrailBreaker bases its charges on how long the company spends with a retailer. Typically the cost starts at $50,000. Payback time on the investment from increased sales is about three to nine weeks, Bailey says.
The Internet will always have advertisers fishing for customers. And as the demand for results increases, those advertisers will spend more time searching for customers’ favorite feeding spots—making contextual marketing the next generation of online advertising. “The question,” Rubin says, “is when, not if.”
rick@verticalwebmedia.com
Gazing into contextual marketing’s crystal ball
With technology rapidly changing, how retailers market themselves could change dramatically too. Some believe wireless and interactive TV advances will lead the way.
According to Eric Marcus, vice president, general counsel and director of e-business research and consulting with The Concours Group, the future of contextual marketing may be Orwellian. “Imagine you’re walking down the street with your cell phone or palm device on,” he says. “It flashes you a message ‘I know you’re a Bach lover. Two doors down from where you are right now, we have a sale on Bach CDs. We’ve got a great selection, why don’t you come on in?’” The next generation of these handheld devices will have global positioning capability and a broader band, possibly as wide as 3.5 giga-bytes (large enough to send an image). With this information and technology, the music store could make the sale price just to that one customer. “All of a sudden your retail advertising concept changes from having to come up with coupons for a mass media audience to being a market of one audience and a sale of one.”
This technology, Marcus says is available today, and could reach the marketplace during the next two years.
Michele Killman, vice president of marketing with Merchandising Avenue Inc. of San Diego, Calif., sees interactive TV as online marketing’s brave new world. “The future of contextual marketing is huge,” she says. “As the Internet and TV converge into interactive TV, consumers are going to buy products in a different way. If you’re watching the Home and Garden channel because your are interested in fixing up your house, you see a show that is featuring items that you would love to have. Instead of trying to figure out where to find those products, you will be able to interact with your TV and buy those products.” She also believes viewers watching popular prime-time shows will be able to purchase items used in the show. “If you are watching Ally McBeal and love the outfit she is wearing, you will be able to buy right then and there from your TV.” 
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