Monday, July 10, 2006

Convergence of Advertising & Channel Sales?

It seems to me that one clear trend which the Internet has facilitated over the last 10 years is the increasing efficiency of advertising. The first contextual banner ads were sold cost-per-thousand (CPM). While they may not necessarily have been much more targeted than advertising to targeted audiences through niche magazines, banner ads did open up new ways to track the performance of the campaigns through clicks. Next GoTo pioneered targeting ads based on search words, which greatly increased click through rates and lead to the growth of the cost-per-click (CPC) model. Through CPC pricing the advertisers only paid for the ads that really generated interest in their products.* Yet, advertisers soon realized that while it was easy to track the number of clicks a search term generated, it was difficult to determine the relationship between clicks and sales. Cost-per-action (CPA) added even more efficiency to the process because it allowed advertisers to pay only after the prospect took certain steps such as leaving contact information. Acquiring the prospect's contact information increased advertising efficiency because it allowed the advertiser to proactively follow up on the leads generated. However, Google Checkout seems indicate a shift towards actually facilitating the sale, in which case advertisers could deliver 100% efficient marketing campaigns. Under the Google Checkout model it would seem that the most appropriate pricing structure would be a percentage of the purchase price and this starts to look a lot like channel sales to me.

Whether its Ebay+PayPal, Craigslist+RapLeaf, Yahoo, Amazon, Google or Snap that becomes the market leader I think the idea of advertisers facilitating sales will clearly take hold in some form because it is such a quantum leap in terms of advertising dollar ROI. What I find interesting is what will happen to distribution channels as this trend takes hold. The issue of order fulfillment still remains but I wonder if this is the step that concentrates buying direct from manufacturers like Adidas and the end of Zappos.com. At the very least, I think this trend will put downward pressure on distributors' margins.

Advertising platform facilitated sales is likely to evolve most quickly in consumer products but channel sales have long been a frustration to B2B vendors and I suspect that many would be very open to the concept of reducing channel managemnet costs through 100% efficent marketing campaigns. Most enterprise sales are more complex and have a greater number of stake holders than a decision to purchase a consumer product. Purchasing decisions of $6 or 7 figure enterprise sales simply require too much research, time, evaluation, approval and/or customization for an advertising platform to create the lead and facilitate the sale in the same transaction... I just don't see carrier class routers being purchased through Google any time soon. However, I could see this working for SAAS and other low customization products in the SMB market. The lower the complexity of the sale, the greater the ability for the advertising platform to facilitate it.

I wouldn't claim to have any clue how exactly this will play out but I do think that over the next 5 years we will see major collisions between the portals, search engines and ecommerce sites and I suspect the biggest losers will be distribution channels.

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*excluding click fraud

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