Leading economists are calling the current economic meltdown the worst crisis in history, and are stressing the need for a new and more responsible capitalism. This is notable, but by no means new. As far back as 1848, Karl Marx theorized that unconstrained capitalism contained the seeds of its own destruction, the dialectic of capitalism.
Marx argued that there was an inherent conflict between the base of capitalism and its superstructure. The economic base of capitalism was industrial production. The superstructure was the system of private property, under which people owning the technical apparatus received the lion's share of the returns. The two were mutually incompatible with each other.
According to Marx, the base (industrial production) relies on community members working together in an organized and interdependent manner. On the other hand, the superstructure (private property) was highly individualistic. A complex capitalistic society would need rigid structure and direction, but capitalists themselves would seek out a ruinous freedom.
There are important lessons for online advertising professionals here. There are a variety of pricing models available today, and it is important to examine the dialectic within each of them to see which of them would prompt a race to the bottom, and which would result in a steady state.
To be more specific, this argument especially applies to the rapid growth of the cost-per-click (CPC) pricing model that is ascendant in the marketplace today. According to eMarketer, search engine marketing accounted for as much as 40 percent of the internet advertising spend in 2008.
The CPC pricing model has moved from strength to strength since the last recession in 2000-2002. As you might recall, even as online advertising declined by 27 percent, CPC advertising grew by a staggering 820 percent.
The shift was primarily driven by the fact that CPC advertising allowed advertisers to pay for clicks and not for wasted impressions. Advertisers warmed up to the offerings of Google and other search engines, and since then, the growth of CPC advertising has continued unabated.
However, like the example of unconstrained capitalism referenced earlier, CPC advertising cannot maintain its growth in its current state. It contains within it factors that run counter to its promise of increased returns and measurability of online advertising, which in turn will cause it to slow down, and in the long term give way to other pricing models.
These factors include:
Increasing costs of keywords
You might have heard of Jama, the Portland-based software company that moved money away from search engine marketing toward charitable contributions to see if the resulting publicity could generate business in a more affordable way. Jama is not alone in worrying about the rising cost of keywords. If you are a search marketer, you probably have worried about your marketing ROI.
A 2007 DoubleClick Performics Search Trends Report shows that there were nearly six times as many keywords with a cost-per-click of more than $1 in January 2007 than the prior year. The cost-per-keyword increased by 33 percent and the cost-per-click rose by as much as 55 percent.
That, to say the least, is a lot.
Increasing click fraud rate
In the third quarter of 2008, the Click Fraud report maintained by Click Forensics showed a 16 percent industry click fraud rate. The report said that average click fraud rate of PPC advertisements appearing on search engine content networks (e.g., Google AdSense and Yahoo Publisher Network) was as high as 27.1 percent.
With sophisticated technologies like botnets used to perpetrate click fraud on the rise, advertisers could very well end up paying for fraudulent clicks, which in a bad economy is more than wasteful -- it is criminal.
Lack of transparency
Search engines commonly deploy algorithms to determine the cost-per-click and the position of the advertisements. Yahoo, Ask.com, and Google have their own algorithms to determine the amount marketers will have to pay for a given advertisement.
The problem is that there is little to no transparency in the algorithm. It is difficult for marketers to determine how landing page quality, the quality of the ad copy, and variations on the bid price work together to determine the exact position and price of the search advertisement.
There is yet another element that contributes to the lack of transparency.
Often, it is difficult for the online marketer to know exactly where the click is coming from. Search networks often encompass a large number of sites beyond the primary entity. Many search engines don't divulge the member sites of their "content network."
The lack of transparency can ultimately be an inhibiting factor in increasing return on investment.
Difficult to tie campaign to business metrics
Metrics such as clicks, click-through rates, and cost-per-clicks are far removed from actual business metrics like acquisitions and sales. As a result, many marketers are unable to correlate the two, and optimize campaigns in an effective manner that will help them drive revenue.
According to the "2007 Marketing ROI and Measurements Study" from Lenskold Group and Marketing Profs, only 9 percent of marketers say their ability to measure the financial returns across all forms of marketing is "a real source of leadership" or "as good as it needs to be."
A McKinsey report, "How poor metrics undermine digital marketing," written after a survey of 340 senior executives around the country, sums it up aptly: Hobbled by nascent technologies, inconsistent metrics, and a reliance on outdated media models, marketers are failing to tap the digital world's full power.
To prevent a race to the bottom, the online advertising industry will have to ring in important changes that will address the shortcomings of CPC campaigns as they exist today.
1. Change in pricing models: If the last recession saw the industry move from a CPM to a CPC pricing model, the current recession will see the logical progression towards the cost-per-lead (CPL) pricing model. A move to CPL advertising will solve the problems resulting from expensive keywords and high click fraud rates.
"The industry is moving towards CPL advertising," says Daniel Taylor, senior analyst in Yankee Group's Consumer Research group. "The CPC pricing model is a placeholder for CPL," he says. "Advertisers only want to pay for very specific consumer interactions, and not for wasted clicks or impressions."
2. Improved transparency: Be it for display advertising, search advertising, or online lead generation, there will have to be a move toward greater transparency. Stretched for dollars, advertisers will want to optimize their campaigns to the greatest extent possible, and transparency helps them identify better performing placements accurately.
3. Improved customer relationship management (CRM): Marketers will also have to focus to a greater extent on the campaign backend to ensure that their marketing campaigns convert into tangible returns and revenue.
Email service providers and other CRM solutions will reap the benefits of this holistic marketing approach. According to Datamonitor, the CRM industry is forecast to reach $6.6 billon by year-end 2012, growing at a compound annual growth rate of 10.5 percent.
Bad times bring about change -- that in turn lead to good times. The movement toward CPL advertising, improved transparency, and a greater focus on CRM are important ones will help online advertising deliver on its promise and hopefully prevent it from sowing the seeds of its own demise.
Zephrin Lasker is co-founder and CEO of Pontiflex.