Tuesday, May 09, 2006

Follow the User

In 2006, American industry will spend $290 bn on advertising. How much will be spent on-line as a percentage of the total? 4.6%, or $13.4bn.

It is quite remarkable that despite the pay-for-performance advantages and closed-loop nature of on-line spend versus off-line spend that the number is so low. Newspaper spend is 6.6x that of on-line spend - why? How long can this last?

In many ways, on-line ad spending is changing our relationship to our service providers - more and more content and application functionality is ad-supported - email, storage, video, news, calendaring, IM, 411 calls, etc - and the companies that recognize the move to providing users high-quality product while providing advertisers high-quality demographics and targeting mechanisms are clearly winning.

Google's model: revenue = users x queries/user x ads/query x clicks/ads x revenue/click is powerful. Queries provide targeting information (what is someone looking for, watching, blogging about), clicks provide insight and accountability (how many consumers find this campaign relevant and useful), and revenue/click helps advertisers understand cost of customer acquisition and helps site that provide meaningful user populations, user segmentation and targeting monetize their users.

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