Traditional media-buying negotiations are pretty straightforward: The publisher has some inventory it wants to sell, and the advertiser that is willing to pay the most for that inventory wins! It’s that “supply and demand” concept that you learn in Econ 101.
That model, however, is under threat, and it’s being challenged by internet marketing behemoths like Google and Facebook. The future of media buying — if these companies get to decide — will be driven by a combination of price and engagement.
In other words, advertisers will be awarded inventory based on their ability to come up with content that consumers actually like.
Salvo #1: Adding Click-Through Rate To The Mix
Among the many innovations Google has brought to advertising, perhaps the most significant is the inclusion of click-through rate (CTR) in the determination of whether an advertiser wins an auction for inventory.
Prior to CTR, the standard model was “he who pays the most per click wins!” In the SEM world, this was pioneered by GoTo.com (which eventually became Overture and then Yahoo Search Marketing).
The problem with pure cost-per-click (CPC) bidding is that it gave irrelevant advertisers the ability to bid insane amounts on a CPC basis but create ads that drove branding without clicks. In other words, the advertiser got a lot of free impressions, and the publisher didn’t get paid.
I know this to be the case, because I used this technique in the early 2000s when I worked for FindLaw.com. Rather than creating an ad that said, “Find the best lawyers online – search now!”, my ads would say something like, “FindLaw, #1 online legal resource.”
Notice that there’s no call to action on the latter ad, so the CTR was abysmal. But I didn’t care because I was getting millions of impressions and paying peanuts.
Google AdWords changed the rules by determining auctions through a combination of Maximum Cost Per Click bid multiplied by CTR. An advertiser willing to pay $100 per click but with a 0.1% CTR would now lose to an advertiser paying $1 per click with a 1.5% CTR. So now advertisers had to at least create ad text that was interesting to searchers, even though the landing pages could still be mostly irrelevant once the searcher left Google.
Salvo #2: Quality Score
Adding CTR solved the problem of freeloader advertisers (like me!) running branding ads at the expense of publishers, but Google soon realized that the system was still lacking. As noted above, an advertiser could create a highly relevant ad and then send the user to a highly irrelevant landing page.
And while it is true that Google gets its cash as soon as the searcher clicks, irrelevant landing pages still cost Google money. Why? Because users who land on irrelevant pages are less likely to click on future Google ads, thus reducing Google’s future revenue.
As a result, Google launched a rather opaque system to measure relevancy beyond just CTR, which it calls Quality Score. As Google defines it, “Having a high Quality Score means that our systems think your ad and landing page are relevant and useful to someone looking at your ad.”
To be clear, even with Quality Score, the core determinants of AdWords rank are still max CPC and CTR, but by simply including landing page relevance as a factor, Google can now exert control over both the quality of the ad text and the actual user experience of the advertiser’s site.
The Quality Score algorithm — from what we can tell — determines landing page relevancy through a combination of quantitative and qualitative factors. Quantitatively, the primary measure of landing page relevancy is a page’s “bounce rate” — that is, the percentage of people who immediately leave the advertiser’s site after clicking on it. Presumably, users who leave quickly didn’t find what they were looking for, and therefore, the page is irrelevant.
Google also has an army of human reviewers who manually evaluate pages for relevancy — this is the qualitative aspect. If a Googler finds that an advertiser’s page does not meet Google’s standards, the page can receive a low Quality Score; in extreme cases, the advertiser can be permanently blocked from AdWords altogether.
Salvo #3: Facebook’s News Feed Algorithm Update
Facebook recently announced an update to its News Feed algorithm that — if applied to advertising — would take consumer engagement metrics to an entirely new level. As described on its blog, this new Facebook algorithm essentially creates a comparative measurement of News Feed posts.
Rather than looking at bounce rate or time spent on site in a vacuum, Facebook now determines a post to be relevant “if people spend significantly more time on a particular story in News Feed than the majority of other stories they look at.”
This normalization of engagement essentially challenges posters on Facebook to compete against other posters to create the most relevant post possible, in the same way that the inclusion of CTR in the AdWords algorithm forced advertisers to compete for the most relevant ad text possible. Imagine what might happen if Facebook eventually applies this normalized engagement factor to the ad auction?
Theoretically, Facebook could determine engagement at two levels: in an individual’s News Feed, and between advertisers in a similar vertical. In other words, if you wanted to run a mortgage ad, your ad would only show up on a user’s News Feed if that user was likely to engage with a mortgage ad and your mortgage ad was found to be more engaging than other mortgage ads.
Engagement Everywhere?
Google and Facebook are essentially forcing advertisers to improve the stickiness of Google and Facebook, in many cases at the expense of the advertisers’ ROI. This makes a lot of sense in the long run, as it keeps users coming back to Google and Facebook and clicking on ads.
Compare this to the state of TV advertising today. Most consumers have DVRs that enable them to skip commercials on their recorded shows. I imagine that if consumers had the option, they would skip commercials on live TV as well. Why? Because the ads are mostly irrelevant to the consumers’ lives.
The average consumer only purchases a car every six years but still must sit through thousands of commercials trying to convince people that Buick is hip or GMC is powerful, or whatever the latest campaigns are. Advertising, in the traditional realm, is mainly invasive and irrelevant.
The world is changing quickly, however. Eighty-four percent of smartphone users use their devices while watching TV — I’m going to assume that much of that time is spent on the phone during commercial breaks. And despite the fact that Internet-enabled TVs are growing in popularity, I’ve seen little indication that the TV networks really want to award TV spots based on anything more than the highest dollar paid.
It seems inevitable that this will have to change. Consumers have too many choices today on how to spend their free time, and too many distractions during that free time.
Facebook and Google have recruited advertisers to create content with which consumers actually want to engage. Advertisers and publishers that believe they can force consumers into paying attention to irrelevant advertising are likely to see their ad rates and traffic decline.
Advertising and engagement are blurring — accept the new reality or get left behind!
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