As Originally Posted in The Wall Street Journal
As marketers scale back their ad budgets, some new technologies that make it easier for marketers to track the impact of their online advertising are gaining ground.
Products based on these technologies -- such as customized ads that show different products to different users, Web ads hidden inside links in text, and online coupons -- are part of what is called "performance-driven advertising." That's because the products aim to improve and more precisely measure how a particular ad performs.
While no one format is likely to emerge as a silver bullet for marketers seeking to use their ad dollars more efficiently, the advertising industry is betting on these technologies to increase online advertising spending. Altogether, the U.S. online-ad market is expected to increase 9% to $25.7 billion in 2009, slowing from its year-earlier growth rate of 11%, according to estimates from research firm eMarketer.
Internet retailer Overstock.com is becoming a big user of performance-driven ad products. The Salt Lake City company is planning to spend about $15 million, or 20% of its overall marketing budget for this year, on personalized ads from Choicestream, which makes product-recommendation software, says Overstock Chief Executive Patrick Byrne.
To devise the personalized ads, which Overstock started testing a few months ago, Choicestream relies on data the retailer provides about what customers browse and purchase on its site. Choicestream uses the data to select what personalized products and offers to insert into Overstock ads as they appear to potential customers browsing the Web.
Mr. Byrne says that while Overstock hasn't had much luck with online display advertising in the past, the new, personalized ads drove a sevenfold increase in clicks on the ads and a threefold increase in sales relative to other display ads. "We are ramping it up as quickly as we can," he says.
Internet giants Yahoo and Teracent, which develops online display-ad technology for clients like Hewlitt Packard, offer customized ad products similar to Choicestream's. Yahoo's version, called Smart Ads, debuted in 2007. Michael Walrath, a senior vice president at Yahoo, says demand for Smart Ads has grown during the economic downturn, even though fourth-quarter revenue was relatively flat from the previous year. A new Yahoo service that allows advertisers to target their display ads to users who have searched for particular terms has also gotten a good reception, he says.
Advertisers' "budgets may be reduced, but the expectations of driving business aren't being reduced," adds Mr. Walrath.
Companies like Choicestream, Yahoo and Teracent hope to steal some thunder from search advertising, which remains one of the biggest and fastest-growing ad formats. Since search ads are related to what a person is searching for on the Web, consumers often find them more relevant than other ads, and advertisers typically find them more cost effective.
But as budgets tighten, other formats that can prove they are worth their price are gaining momentum too. Coupons Inc., which makes software to help companies create and distribute online coupons, is among the companies that are benefiting. It has seen a recent surge in interest from advertisers looking for more cost-effective online marketing options, says CEO Steven Boal. Mr. Boal says the company expects to issue $1 billion in coupons this year, up from $300 million last year, and is drawing new customers who appreciate that they pay for the service only when a consumer prints out a coupon.
Committed revenue for the year at Vibrant, which creates in-text ads, has doubled from a year ago, says the company's CEO and co-founder Doug Stevenson. In-text ads appear when a computer user hover a mouse over links that appear in the text on a Web page. Vibrant charges advertisers only when someone clicks on their ads.
The new ad formats are winning over some big marketers. Over the past year, auto maker Chrysler, whose brands include Dodge and Jeep, has shifted its online-ad spending away from lifestyle sites to sites, such as Edmunds.com, that are geared toward consumers who are in the market for a car, as well as toward performance-driven products like Vibrant's in-text ads. Chrysler is also continuing to spend on search ads, says Chuck Sullivan, director of interactive at Chrysler.
"The good news about the performance-based media is that it's very easy to track, and we are able to see what works and what doesn't work," Mr. Sullivan says.
Chrysler says the shift has paid off: The percentage of total retail sales attributed to online leads rose two percentage points in 2008 from the prior year.
