Sponsored search and economic crisis
What we have seen so far in online advertising is a shift from brand spend to direct response spend, i.e. from banner into sponsored search, affiliate marketing and the likes. It does make complete sense. Given the though economic environment, and the pressure in companies on controlling costs while maintaining revenues, a shift from brand spend (i.e. demand generation) toward direct response (i.e. demand fulfillment) makes complete sense. You are leveraging the “halo” effect of brand campaigns by focusing on direct response. Basically, you shift toward “harvesting” from “seeding”.
As I have written before, this rush toward demand fulfillment advertising can generate more competition and therefore higher prices in sponsored search, for a little while. If the economic downturn is brief and not severe, than direct response will go through it quite nicely and easily. If, on the other side, the economic downturn is more severe and prolonged, then direct response will suffer as well, although with a lag versus demand generation advertising.
The reason is quite simple, and it is in the economics. In demand fulfillment/direct response, all an advertiser cares about is return over investment (ROI). Quite simply, if they put 10£ in, they want to get at least, say, 11£ out. The more severe the economic downturn, the lower is going to be the ROI. This would be a reflection of the worsened financial conditions of the consumer, less willing to hand out his money. In a though economy, the consumer tends to spend less, hence the conversion rates of direct response will go down. At the beginning, there might be little or no effect on price, but as the conversions keep falling, the ROI will hit a lower bound that will force advertiser to decrease the CPC they are willing to pay. The obvious consequence will be a decrease in the monetization levels for sponsored search.
Funnily enough, sponsored search will suffer during an economic downturn not for lack of advertisers. There might be more advertisers than ever. It will suffer from a soft consumer spend, that will put a downward pressure on lead prices, lowering the overall monetization levels.
I bet the US economic situation is getting to such a point where even sponsored search, that has proved quite resilient so far, will be negatively impacted.
If this situation lasts for just a quarter or two, then is not going to be a big issue. Sponsored search operators have levers that let them increase monetization by, for example, increasing coverage or the number of listings they show in a page (depth). But if the economic softness lasts more than a quarter or two, these levers will simply push the problem into the future by a quarter or two, but then economic crisis will bite probably even more vigorously, and that formidable cash machine known as “sponsored search” will start suffering.
Sphere: Related ContentDid you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.
Comments
No comments yet.
Leave a comment