Rising Online Competition May Dilute Ad Effectiveness

To all the marketers who think they are saving money while increasing ad effectiveness via online media channels, MIT Sloan Assistant Professor Alessandro Bonatti has a message for you: Not so fast.  Bonatti and co-​researcher, Yale-​based Dirk Bergemann agree that online advertising allows marketers to target specific demographic groups efficiently. However, in highly competitive industries, many marketers may end up chasing the same group of customers.

The higher level of competition will result in decreased profitability for marketers, partly because of higher advertising costs and partly because of lower prices needed to win customers. Bonatti says, “[s]o while online advertising certainly has the potential to drive out traditional advertising, it does not necessarily follow that online advertisers will make more money.”

Bonatti suggests that online ad effectiveness will vary by industry. “You can make a lot of money through super-​powerful targeting if you are a monopolist, but not in a competitive market.” These findings are important to consider with respect to the CPM (cost per thousand impressions) that ad networks are commanding for specific industries. In the last three quarters of 2009, costs increased for food, entertainment, and real estate marketers. For example, food marketers saw their CPM impressions rise from $1.50 in the first quarter to $6.94 in the third quarter.

This topic is too complex to fully analyze in a blog post, but Bonatti’s take-​away message can be easily summarized. Marketers will need to review their industry and their targets as they shift part of their ad budgets online. In some cases, it may be more cost-​efficient to stay with traditional media.

[Source: MIT Study Debunks Online Ad Advantages, marketingcharts, December 2009] 
Kathy Crosett
Kathy is the Vice President of Research for SalesFuel. She holds a Masters in Business Administration from the University of Vermont and oversees a staff of researchers, writers and content providers for SalesFuel. Previously, she was co-​owner of several small businesses in the health care services sector.