Advertisers include Digg stories relevant to their industry or mission, and include links to these stories in their ad message.  Brilliant!

Apparently, they are getting 100 times the average CTR of standard display ads.  Finally, someone’s figured out a way to make the content part of the brand message.  It’s basically combining the power of contextual advertising with the branding power of display ads – a solid combination since traditional contextual text ads (ie. Google Adsense) don’t have the branding/visual element and result in anemic CTRs.

You can read more about the particulars here on the Digg blog: http://blog.digg.com/?p=1057

Well done Digg…

My favorite paragraph of the report:

“according to our study, consumers don’t want a conversation with brands—they want deals. Of those who follow a brand on Twitter, 44% say access to
exclusive deals is the main reason. The same holds true for those who “friended” a brand on Facebook or MySpace, where 37% cite access to exclusive
deals or offers as their main reason.”

Amen.  It’s the nature of human behavior for consumers to think in terms of “what’s in it for me”, and no amount of technological disruption is likely to change that.  So for brands that want to engage consumers in social media, they need to “give” before they can expect to “get”.

Currently most of the giving is in the form of deals in order to begin or strengthen a relationship with an engaged customers.  Over time, brands will become much more sophisticated about this.  The golden opportunity for brands is to get to a point where they can make customized offers via social media that are tailored to  individuals rather than the standard “one size fits all” deal, discount, or promotion.  The holy grail of personalized 1:1 marketing has been talked about for a long time, but the adoption and growth of social media is only now laying the foundation for some real innovation to happen in that area.

Get the full report here: http://feed.razorfish.com/

Spending on SEM (buying pay per click search ads) by US advertisers over the last 12 months was over $10 billion, while spending on SEO (optimizing websites for better rankings in organic listings) was only $1.3 Billion.  However, more than 75% of all search traffic comes from SEO/organic listings.  SEM/sponsored ads account for less than 25% of all search traffic.  What gives??

It’s easy to understand the traffic pattern by looking at this image (hat tip to SEOmoz):

Most of the eyeballs go to the natural listings and not the paid listings.

So why is it that 85%+ of all spending on Search goes to SEM and PPC ads, while less than 15% is spent on SEO – which drives most of the traffic?  Doesn’t seem to make sense.

My guess is you’ll see the gap decrease over time, but there are several fairly clear reasons that explain the disproportionate spending on paid search.

1. It’s much easier to track ROI and metrics/results from buying PPC search ads rather than doing SEO, so this is what most agencies push.  It’s easy to say, “I paid $xx per click, got xx total clicks, converted xx% of the clicks, which resulting in xx revenue/leads/registrations, which results in an xx% profit for the campaign”.  Try making the same argument for justifying your spending on search engine optimization.  It’s hard to do because it’s a large upfront investment with results that often takes months to see.  Even when you do see results from SEO, it’s harder to quantify as compared to SEM.

2. The ease of starting a SEM campaign.  Anyone with a website and $5 to spend can sign up for Google adwords and start getting traffic.  A lot harder to get started with SEO, which involves all optimization of metatags, titletags, content/keywords, links, etc…Most people would rather watch paint dry than start a SEO optimization project.  We live in an instant gratification culture, so it’s no surprise that SEM gets most of the $earch spending.

3. Buying Pay Per Click ads is guaranteed traffic, as long as you have the budget for it.  With SEO, there is no guarantee.  Any wonder marketers choose to spend more money on SEM?

4. Pay per click is advertising and easy to understand in that context.  SEO is harder to describe in the context of advertising.  I find this to be a silly reason for choosing SEM over SEO, because both sources provide the same exact result – which is a visitor to your website.  However, when you are dealing with advertisers, agencies, and budgets for advertising it’s a lot easier to justify spending on SEM versus SEO.

As the average cost per click continues to rise for PPC ads and the competition becomes even more fierce, I think it’s a fairly good bet that we’ll see SEO become a larger piece of the overall search pie.

As is the case with almost any new innovation that has a market based economic opportunity, the profit potential for arbitrage is always greatest when the market is most inefficient and the delta between supply and demand is highest.  Over time, as markets become more efficient it becomes harder to profit as an arbitraegeur.

The reasons what the arbitrage opportunities are not what they used to be are fairly simple at the surface level.  Average CPC for targeted traffic is 3-5x what it was 5 years ago, while commissions/payouts have not increased materially.

But if you dig deeper, there are plenty of other reasons as well.  A major factor is that search engines such as google are cracking down on affiliate marketers in a major way.  They don’t see them as positive actors contributing to their mission of “relevant advertising”.  There’s a good reason for this – as for years affiliate marketers made tremendous profit promoting shady offers and horrible user experiences.  That behavior is making it difficult for new well intentioned affiliates to now get into the game.  Simply sending traffic to an optimized affiliate landing page results in a “low quality score” by google, which means paying a much higher CPC than legitimate advertisers with actual websites and web content.  So affiliates can no longer see an opportunity, quickly throw up a landing page, and test the results with a small traffic buy.  They need to invest in building something that resembles a real site with inbound links and content, if they want to buy the traffic for a reasonable cost.  This is a huge friction point, as most affiliates will not take the risk of doing all the work only to find out they can’t turn a profit.  Quick and easy tests are the weapon of the smart arbitrageur, and that weapon is being taken away by the powers that be.

Other issues such as merchants restricting bidding on keywords that contain their trademark or brand (which makes sense but wasn’t very common years ago) are making it hard to compete for high volume and quality keywords.  Merchants are also much savvier and generally have clear metrics on acquisiton cost and lifetime customer value, and will quickly cut off affiliates that are sending traffic that converts but does not meeting their metrics for quality and lifetime value.

Ironically, the affiliates that got in the game 5-7 years ago are “grandfathered in” to a certain extent.  By no means is it easy for them – it’s not.  But for paid search traffic, for example, since they may already have purchase history, optimized campaigns/keywords/landing pages, etc. – set up, they don’t face the same challenges of a new affiliate trying to “break in” to the system today.

So anyone out there considering playing the PPC arbitrage game as an affiliate, make sure you do your homework before jumping off the cliff!

The goal of the advertiser is to get the best ROI possible from their media buys, the goal of the publisher is to maximize monetization from their inventory, and the goal of the middleman or middlemen is to get the most out of the value they provide in the chain.  In essence, they all have the same goals – to generate the highest possible profit for their business.

It’s the chain of middlemen between the advertisers and the networks that I find most fascinating because the only way they build a sustainable business is by providing the best possible ROI to both advertisers and publisers, while simultaneously trying to meet their own profit maximization goals.  It’s this delicate balancing act that keeps the industry so dynamic and pushes innovation forward.

Ad networks were the first level of efficiency brought to the market, but there are a few clear inefficiencies with the traditional ad network model.   Ad exchanges tried to address those inefficiencies and have succeeded to a large degree, with all the industry giants now owning and operating ad exchanges.   What’s interesting is how ad exchanges will leverage valuable targeting data from 3rd parties online data providers are going to make the traditional ad network obsolete.

Let’s first clearly define the difference between an ad network and an ad exchange.

An ad network aggregates supply from publishers and aggregated inventory to advertisers.  This is clearly an efficient way for advertisers to buy media since they don’t have to deal with tens or hundreds of individual publishers.  Can you imagine if Netflix had to do a deal with the thousands of sites that run it’s ads?  Despite the clear value they provide, however, advertisers and publishers both have a little bone to pick with the traditional ad network model.

Advertisers often complain that they don’t know exactly which sites their ads run on (since many ad networks are ‘blind’ networks).  If there are 1,000 sites in the ad network, they’d naturally like to know exactly where their ads are run.  The other big issue from the advertiser perspective is that the ad network in incentivized to deliver the number of impressions agreed upon in the campaign, while trying to maximize their own profit.  For example, let’s say an advertiser makes a buy of 10 million impressions at a $1 CPM (cost per thousand impressions), for a total cost of $10,000.  They know quite will that the goal of the ad network will be to deliver those 10M impressions at the lowest cost possible – so they can maximize their proft – while meeting the overall campaign goals so that the advertiser will continue to buy from them.

The publishers, on the other hand, are unsure if they are getting the best possible eCPM (revenue per thousand impressions) for their inventory.  They know that the ad network is trying to “buy low, and sell high” – so they are always a bit skeptical that they are getting the best possible deal.

The ad exchange model addresses these core issues.  While the traditional ad network controls the supply of ad inventory (publishers) and demand (advertisers) on it’s network, the ad exchange is a platform where supply and demand is not controlled by any one company.  Any company that wants to either buy advertising inventory or sell advertising inventory is able to do so down the the level of an actual ad impression, simply by joining the exchange and participating in an auction.  The price paid by a buyer or seller is closer to the true market value based purely on supply/demand.  This is a huge leap forward in terms of efficiency and transparency, and will bring yet more innovation and healthy competition to the market.

With exchange technology, advertisers can buy only the inventory they want and pay (or bid) only the price that they want.  Publishers, on the other hand benefit because they know they are getting the highest possible price for each impression they serve since advertisers are bidding for their inventory.

So now that supply and demand of ad inventory is more efficiently aligned in the exchange model, what is the next wave of innovation going to look like in order to make online advertising more effective for all parties involved.  I think it’s clearly the evolution of online data providers.  Companies such as BlueKai and eXelate are quickly gaining traction. They do not buy or sell advertising like a traditional network – instead, they simply buy and sell data which can be used to improve advertising.  Better data equals better targeting of ads which result in better advertising rsults.  No longer do networks or exchanges have to be constrained by the data they collect through their network.  They can simply partner with companies like Blue Kai to get cookie-level data on users that they have no prior data for.

This combination of precision targeting data with the reach and efficiency of the exchange model will bring online advertising another step forward in terms of delivering results and reducing waste.

As interactive marketing continues to cannibalize traditional media, the noise and clutter both online and in the inbox will only increase.  Simply blasting out the same email message to the entire list (aka the ‘spray and pray’ method) results won’t cut it much longer.  The good news is that there are new strategies, techniques, and tools that are maximizing the value of the channel and can boost ROI for marketers that use them.

While baseline metrics such as deliverabiliy, open rates, click-thru rates, and conversion rates aren’t going anywhere – what’s becoming more sophisticated is list segmentation, targeting, and optimization.  All in the name of improving relevance, which remains the key objective for marketers.

For example, more marketers are increasingly using email click-thru data for behavioral segmentation.  Using website clickstream data to send more targeted offers via email has been shown to improve relevance and ROI.  Another trend that is boosting click thru and conversion rates is the insertion of dynamic data (primarily social marketing tactics such as user product reviews and sharing capabilities) into the email offers.  We’re also seeing email automation and retargeting around behaviors such as shopping cart abandonment.

A recent forrester report on email marketing mentioned an example of Chefs.com, which created four master customer segments based on spending, behavior, and attitudes – which resulted in average order size increasing by 67% and 31%, respectively.

The savvy email marketers of the future will segment their list even further in order to drive more performance out of the channel.  Segmenting based on customer spending, customer profitability, recency and frequency of purchase, and loyalty, will become more common.  More profitable and loyal customers will (and should) be treated differently.  These strategies and tactics will allow marketers to increase the value of each subscriber to their list, so they can optimize for profitability on a per subscriber acquisition basis.

All this is good news for the email marketing channel.  Gone are the days of blasting out canned messages to as large a list as possible.  It’s now about being relevant to each subscriber in a world where it is becoming increasingly challenging to do so (but I’ll leave that topic for another post)!

The need to be both passionate and dispassionate:
-As much as you need to be passionate (it is often said passion is the fuel on which startups are run), there are times you need to be dispassionate. When it comes to evaluating the results and the execution of your startup, put the passion aside. Numbers don’t lie. Often times, entrepreneurs are tempted to be less than honest with themselves – especially after they pour everything they have into their startup.  I am certainly guilty of this myself.  Sometimes, reality sucks, but ignore it at your own peril.  As entrepreneurs, we need to remind ourselves that the world doesn’t really care about our company, vision, or passion.  It only cares about having it’s problems or desires addressed – which is where all focus should be directed in the first place.  When optimism is unbridled and unchanneled, it’s not an asset – it’s a liability.

Listen to others versus the need to listen to yourself
-Having access to the advice of others whom you respect is priceless.  But when you are doing something new and novel (which by definition all startups should be doing), you will get conflicting advice from people that are incredibly smart, attuned to what you are trying to do, and motivated to help you succeed.  As much as being a good listener is important, listening to your own voice and instincts is equally crucial.  It’s the job of the entrepreneur to take all the various and often conflicting perspectives and then make their own decision.

Think big and be ‘Revolutionary’, but be practical and be ‘Evolutionary’
-The biggest problem with being revolutionary is that it is in direct conflict with the human desire for consistency.  Chances are, whoever your customer is, that if you show them something that is so different than what they are used to – they probably won’t ‘get’ whatever your vision is.  It’s often better to be evolutionary.  This way you are not forcing your customers to adopt a new behavior (an almost surefire recipe for failure) and they can more easily compare you to the alternatives.  Of course, if you’re evolutionary you’ll probably also hear that you’re not ‘different’ enough.  I say, forget about labels such as revolutionary vs. evolutionary.  Just figure out what your customers value and figure out a way to give it to them.

The need to ’stay the course’ versus the need to ‘change course‘
-We’ve all heard stories about companies like Blogger, that suceeded largely in part by believing in their vision and staying the couse – even if it meant they were down to 1 full time employee and had to ask their users for donations in order to continuing to run the service.  They world eventually came around to their vision of blogging, and they have a great outcome (acquired by Google).  But lots of other startups that do that will go over a cliff, and the only way to prevent that if from constantly adapting the product, strategy, target market, business model, etc.  It’s the classic “stay focused” versus “keep evolving and changing” paradox.

I’m sure there are plenty other entrepreneurial paradoxes as well!

Yes, I know the title sounds ludicrous.  After all, the unbridled appetite for risk from those Wall Street buffoons almost took us to economic Armageddon.  But underneath the greed and recklessness, is a sophisticated system of evaluating upside (profit) against downside (risk) that marketers can learn – and profit – from.  And do it in a way in which they get paid for real value created and delivered to the market, rather than the vapor of value creation based on the financial engineering of Wall Street.  Curious?  Then go grab a beverage – since this isn’t a 140 character tweet – and let me show you how a little creativity and innovation from Marketers can have Wall Street wondering how someone else besides them is making a boatload of money.

Let’s start with a quick test: name one specific advertisement that you’ve seen in the last 24 hours?  You’ve easily been exposed to hundreds of them, so name just one.  Most normal people aren’t able to.  If you were abnormal enough to answer that, here’s another: when was the last time you made a purchase as a result of a cleverly conceived direct marketing offer?  I’ll bet most of you draw a blank on that one too.

$140 Billion will be spent on advertising this year in the US.  That’s $458 for each man, woman, and child in this country.  Some recession we are in.  Somehow, all that dogged persuasion leads to $5.2 trillion in direct and indirect spending attributed to advertising.  Staggering numbers for sure.  But let’s stop and ask a fundamental question.  Are those billions of dollars in advertising spend efficiently allocated?  In other words, is it possible that we could we get the same level of economic activity if advertisers only spent 80% of what they actually spend today?  The answer is a resounding yes.

Many of those billions spent on advertising are simply wasted, creating no economic value whatsoever.   We’ve all seen plenty of poorly conceived and utterly ineffective ads, so I’ll spare you the data on that.   You may have heard of the famous advertising axiom from a pioneering department store merchant “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half”.

Now, most buyers and sellers of advertising would say that it is a fairly efficient market driven by the fundamentals of supply of ad inventory (publishers & media) and demand of ad inventory (advertisers and agencies) – and they may be right – it is a fairly efficient market on the buy and sell side.  But inefficiencies occur in companies and industries, as well as markets.

For example, the kings of private equity on Wall Street are the LBO (leveraged buyout) companies such as Blackstone and the Carlyle group.  These firms don’t care much about market inefficiencies – they look to profit from inefficient companies.  They look for companies that are poorly run and operated, so that they can use their ownership to turn them around and mint some serious money in the process.  Whether they create their wealth largely through financial engineering is often debated, but that is not the point here.  What they brilliantly have figured out is how to master the concept of leverage to generate massive profits.  In the case of LBO’s, leverage is in the form of debt – lots of it!  The LBO model has built powerful firms run by billionaire financiers, some of whom famously spend $3 million to celebrate their 60^th birthday.  But I digress…

Just as Wall Street benefits from inefficiencies in markets and companies, let’s take a look at how bold marketers can benefit from the massive inefficiencies in the advertising industry.

First, let’s make a simple distinction.  Marketing and Advertising since they are not the same thing.   Advertising is one component of Marketing, but successful commercialization of a product or service goes beyond just the advertising.  Product packaging, design, presentation, pricing, messaging, distribution, etc. are all part and parcel of the function of Marketing – of which advertising is just one piece.

Now that we have that out of the way, let’s talk about “leverage”. There are different kinds of leverage, and even though use of the term has been restricted to the world of finance – the function of Marketing is a perhaps the most powerful form of leverage.

Let’s define what leverage is – it’s simply a way of getting potentially more output or impact (ie. higher return) for a given input or strategy.  It’s basically “more bang for your buck”.  Defined as such, the concept is as applicable (if not more) to the world of marketing & advertising as it is to finance.

For example, when a company chooses to buy and run an advertisement in any form of paid media – their cost of running that ad is independent of the return they might get.  In other words, it costs them the same amount of money to run the ad if they got 1 prospect or customer, 100 prospects or customers, or 1 million prospects or customers.  It’s a fixed cost.  It is the overall quality of the overall marketing that will determine if the campaign succeeds or fails.  There are many potential variables that will impact the response to a specific advertising campaign that go way beyond the advertisement itself.

-Is it a compelling product, service, or solution with a strong value proposition?

-Is it aimed at the proper market or target audience?

-Is the ad well designed with compelling creative and persuasive ad copy?

-Is the message or offer structured in a way to elicit the desired response?

-Is the message placed in the right mix of media (TV, print, direct mail, web display, web search, email, online video, direct mail, social media, blogs, viral/guerilla marketing, affiliates/partnerships, contests/sweepstakes, PR, radio, etc.)

-What type of targeting is used to reach the target market? (Demographic, geographic, psychographic, behavioral, etc.)

-Is the price right?  What would a change in price have on demand?

-Is the compelling risk-reversal guarantee or offer to induce the customer to purchase? (Free shipping, money back guarantee, free trial, price protection guarantee, customer service, free upgrades, discounts on future purchases, etc.

-Is the company properly leveraging the goodwill of their existing customers? (Case studies, testimonials, referral programs, etc.)

-How easy is it to try or buy the products?   (Friction points or barriers to adoption)

-How does the value prop stack up against the competition?

I could go on and on, but I think you get the point.

In order to a company to achieve maximum yield or ROI from their marketing efforts, all of the above elements been have to be optimized.  Thanks to the web, optimization is becoming much more of a scientific and data/metrics driven process than ever before.  What is usually unappreciated is how minor changes in several of the variables could lead to big increases in yield or profit.  The only way to really know is to test, retest, and continually optimize.

Let me provide you with a real life example of how the power of optimization – small systemic changes consistently applied – can provide massive leverage (impact on results):

The following 2 ads were run in Google Adwords for the keyword search “Ethernet Dictionary”

Very similar ad – Same ad title, same URL.  The only difference is that the second and third lines are reversed.   The second ad put the benefit statement before the feature.  Most people would assume the performance (defined as the click through rate) would be similar for both ads.  That would be a fatal mistake.

The ad on the left generated a .1% CTR (one click for every 1,000 impressions)

The ad on the right generated a 3.6% CTR – (one click for every 28 impressions)

That’s an improvement of 3,600%!  For a change that is barely noticeable.  That’s real leverage.  If you happened to be a Wall Street quant, you probably just got pretty excited.

Of course, not all tweaks have that kind of impact.  But if you take that simple example, and apply that philosophy of optimization across the entire discipline of marketing – you’re talking about leverage that generates 50x, 100x, 1000x improvements in results or ROI.  That sort of leverage is unheard of in the world of finance.  The best part is that it results in real value creation that has nothing to do with financial engineering.

Most companies today (both large and small) are nowhere near to generating the optimal profits (upside) of any of their marketing campaigns.  Many campaigns outright fail or don’t work.  For the ones that do work and generate measurable profit, marketers are usually happy enough that they seldom know how much potential profit they are leaving on the table.  It’s the classic “it’s actually working, so don’t mess with it” thinking.  They are mostly looking for the “big idea” or “breakthrough ad” that will propel them to new heights, rather than being systematic about optimization.

Take a hypothetical 10 year old B2B widget company that is doing $20 million in revenues by primarily placing ads in trade publications and direct mail.  After all, that’s what everyone in their industry has done for years.  They may think that they are doing well because they have been consistently profitable and have happy customers.  They may not know that they could be doing $100 million in revenues if they did the following:

-Clearly understood the average lifetime value of a customer

-Clearly understood how much they were currently spending on acquiring a customer

-Optimized their entire marketing operation around optimization of the first 2 metrics

-Added new channels for customer acquisition

-Improved product packaging by offering related products and services

-Consistently tested new ad headlines, copy, and product messages

-Changed the sales comp structure to encourage more new customer acquisition

Again, I could go on – but the point is most companies are nowhere near achieving maximum yield from every possible marketing opportunity, strategy, and technique available to them.  That spells opportunity.

The future of direct marketing is not paying for advertising, it’s paying for results. Almost any variable related to direct marketing can be tested, tracked, and optimized quickly and with very little cost.  Smart entrepreneurs today are using tools like Google Adwords to launch/sell products before building them.  It’s classic risk reduction and takes a lot of the guesswork that is typically associated with launching new products, initiatives, and marketing campaigns.  This is a huge shift that will have dramatic implications in terms of reducing waste and inefficiencies.  Companies like Google have benefitted immensely from this shift, but there will be many others as well.

Which brings us back to Madison Ave versus Wall Street and how marketers can learn from financiers.   The bold direct marketers and agencies will recognize the true leverage potential that exists across the entire discipline of marketing, and capitalize on that.

What will this transformation look like?  Traditional ad agencies will continue to exist, but a new breed of agency – let’s call it a “Performance Marketing Agency” – will emerge.  This has already been happening for years online – with companies and individual affiliates playing the arbitrage game by buying media (assuming the media cost risk) and transforming those clicks into leads or customers for their clients.  But the pay for performance model of marketing is much bigger than online arbitrage, which is where it started but most certainly not where it will stop.

The new breed of agency will move away from simply charging their clients for their creative and media buying expertise, and follow in the steps of their Wall Street brethren and embrace the pay for performance ethos and take more risk in exchange for more reward.

They won’t simply be tasked with “advertising” a product after it has been conceived, designed, built, packaged, pitched, priced, and distributed, etc.  Instead, they will play a key role in all of those activities.

They will understand the principles of leverage as it related to results in marketing, and use their creativity but also take a metrics/data driven approach to optimizing all aspects of their clients marketing function.  They’ll increase profits multi-fold for their clients, and get their fair share of all the incremental profit they bring to their clients. They will win big, but only when their clients win. Their interests and the interest of their client are completely aligned.

Just like the Blackstone group started in 1985 with $400,000 in seed funding from it’s partners, created a massive new asset class, and now stands as a titan of Wall Street – we will see a similar transformation in marketing by pioneers who are ready to venture into new territory.  The best part is, they can show Wall Street the true meaning of “Pay for Performance”.