Digital Advertising and Monetization

In a recent keynote at the 2009 National Association of Broadcasters Show, Philipp Stauffer, a senior executive in Accenture's Marketing Sciences group, presented a perspective on the future of monetization in the digital world. In this five-part series, Philipp expands on some of those ideas to help companies take steps toward that future world:

Part  I: The problem of being frame-blinded

Part 2: The end of the funnel

Part 3: Paying for what you get: The new metric  of "Cost per Desired Outcome"
             or CPDO

Part 4: Playing for the end game: Monetization nirvana

Part 5: Moving away from guesswork: Addressing fragmentation with analytics
             and continuous optimization

The Problem of Being Frame-Blinded
"Problems cannot be solved by the same level of thinking that created them," Einstein once wrote, and we see that phenomenon playing out in the world of advertising and broader digital monetization today as companies struggle with new technologies, new platforms, new consumer behaviors and experiences, and new business models.

As we look at reasons for these struggles, a lot of them come down to what I would call being "frame-blinded"—using old frames of reference to try to understand new ones. Or, as Einstein implied,using old thinking to address new problems. Concepts, frameworks and processes that worked well in the old or analog world have been applied relatively unchanged to the new or digital world, limiting many companies' ability to seize new opportunities. Look at an online display ad, for example, and tell me what's fundamentally different about it compared to a magazine ad.

Old-Level Thinking
Consider all the thinking that is still being borrowed from the old days of marketing and advertising. Companies borrow the ad format (one way instead of the two-way capabilities of the digital world); they borrow the limits (message reduction instead of story-telling); the business model (reach and frequency instead of engagement); the pricing model (cost-per-mille (CPM) models instead of performance-based models). They also borrow the media planning process and the media buying process in many of today’s campaigns and initiatives.

Add it all up, and you have a situation where old ways of thinking are preventing companies from really embracing what digital can do—for advertising in particular but also monetization in general from a user's perspective. It's time to admit that something is broken. Admittedly, there are players in the market trying to break with the old world but nothing really “disruptive” has scaled so far except the Google model. That is a pretty sad set of results given that we are now 15 years past the first appearance of a display ad.

The New World: Influence and Dialogue
The old frame of thinking in advertising was about push marketing. The new frame is about influencing consumer choice through dialogue. We're starting to see some powerful examples of what can happen when companies embrace the innovation potential of these technologies and platforms. In my keynote address at the 2009 NAB Show, I set forth a vision for the future of digital advertising and monetization, and highlighted some of the examples that are a step in the right direction.

Consider this year's Super Bowl, the largest TV marketing event of the year. In fact, the game itself is rapidly becoming just a sideshow to all the marketing events associated with it—events that are increasingly moving online. For example, on the day of the game, 50 of the top 100 fastest-rising search terms on Google were related to the Super Bowl—and many of those were about the TV commercials playing during the game.

To leverage that interest, YouTube created a wildly popular offering called "Ad Blitz," which allowed users to view and discuss the commercials, and vote on their favorites. Ad Blitz generated more than 21 million commercial views, and more than 2.6 million votes were cast. For a company like E*TRADE, whose ads were among the fans' favorites, the impact has been significant—a 19 percent increase in online applications for E*TRADE the week after the game. Furthermore, according to E*TRADE’s chief marketing officer Nick Utton, the ads achieved so much viral growth that morning TV shows aired the spots (as content, not paid advertising). All told, this exposure exceeded the value of the investment that company made in the original Super Bowl ads themselves.

Ad Blitz was an effective example of the convergence and multi-screen usage of today's consumers; it also highlighted the power of viral marketing coupled with the desire of consumers to actively participate and not just passively consume. Marketers, media companies and advertising agencies have a tremendous opportunity to bring these convergent trends together. The key barrier is not necessarily that companies don't appreciate the vision or that technology is not available to achieve that vision; it's more that all the silos in methods, processes and mindsets are preventing companies from acting on that vision.

Good News and Bad News
The new frame of thinking for digital advertising brings both good and bad news. The bad news is that companies are no longer perfectly in control of their messages. That can be scary, but in fact it's really a massive opportunity for marketers if they let go of old thinking. Furthermore, the current media and advertising landscape makes it hard to innovate to achieve the digital advantage that is possible, and that can be frustrating. A handful of companies and institutions are working to change all that, but a more aggressive push would benefit everybody.

The good news, however, is that that there are more opportunities than ever, earlier in the marketing and sales process, to engage consumers in dialogue. Whoever takes advantage of that opportunity will win share of mind and build stronger brands in the future. The key is to retool your company to recognize the opportunities and to influence consumers at all of those new touch points.

Next in Part 2: The end of the funnel

Paying for What You Get: The New Metric of "Cost per Desired Outcome" or CPDO
In Part 1 of this series I wrote that advertisers have had trouble breaking out of old ways of thinking so they can truly embrace the innovations and possibilities of the digital world. One example of such old thinking is in the measures by which companies charge for advertising.

Take one common digital metric—"cost per mille" (CPM), meaning the cost to show an ad to a 1,000 viewers. An advertiser pays a certain amount of money every time one thousand users open up a Web page containing an advertising banner (independent of whether or not viewers actually see or pay attention to the ad or banner). Now, how is that metric really any different than paying a newspaper a certain amount for putting your ad in the morning edition? In fact, it's not that different. You're just blanketing the community that subscribes, hoping that enough of your target audience will turn to that page (and eventually buy your product) to justify the cost.

Most recently we have seen interesting attempts to more effectively target and personalize display advertising but not much has happened at scale. Cost per click (CPC) is a step forward but not the end game. Some metrics do begin getting to more defined goals: cost per lead (CPL), for example, pays only when a legitimate and well-qualified buyer expresses interest. There are many other "CPx" metrics out there (cost-per-action, cost-per-acquisition, cost-per-engagement) that try to move the pricing model towards a more accountable and performance driven schema.

Embracing What's Distinctive About Digital
However, if we look at where innovation is happening in the world of advertising today, it's with companies that are embracing the distinctive nature and capabilities of digital and using those capabilities to shape their pricing models.

Google, for example, famously found a way to make a user's "clicks" worth more by linking them to search. If a user is searching for "blenders," that's probably a fairly sound indicator of an intent to buy a blender. That fact, combined with the demand-driven, auction-based marketplace of keywords, made Google what it is today. Google used the efficiency of the market to determine the value of a click. A click isn't the end game—what's important is whether that click then leads to a purchase—but it's a step forward.

Another example: VideoEgg, a media advertising network, isn’t just selling ads. It's guaranteeing brand engagement—the company calls it "accountable online advertising for brands." Their most recent offering, which they call AttentionRank™, identifies when and where users are most receptive to a brand’s message—evaluating media not on an impression basis but on its ability to capture attention. VideoEgg can measure engagement with the ad, time spent with a brand message and secondary user actions such as click-through rates.

Brand engagement is certainly important, but it needs to be further linked to financial consequences and outcomes. It seems to me that the end game we are shooting for is a scenario where the marketer can define a business objective (or a desired outcome) and then easily aggregate a composite of optimized “commercial experiences" (it's a phrase that's now more accurate than "ads") that will drive toward that outcome in an easy and transparent way across multiple platforms and formats.

The Marketer's Mindset (Figure 3)
Marketers want to increase their ability to measure the impact on desired outcomes and incrementally optimize results based on quantitative insights. Publishers and participating ecosystem player should enable marketers to measure and manage their desired outcomes and then only charge for results achieved.

Paying for Outcomes
Where I think we need to begin pushing the industry (advertising as well as media/publishing) is toward something I call "Cost per Desired Outcome," or CPDO. What this metric means is that a marketer can go to a publisher and advertiser and say, "Here is the desired outcome I want to achieve with a particular use of my brand or product. I only pay if I achieve those goals."

We're already starting to see this happen in the marketplace in related areas. Coca-Cola, for example, just announced that it will no longer pay agencies by the hour or based on fixed fees but instead by achieved results. Although this approach is certainly disruptive to any agency’s business model—and comes at a time when cost pressures are already difficult, given the drop in advertising spend (approximately 9 percent in 2009)— it is a sign that accountability for results needs to be integrated into products, pricing and the industry as a whole. Performance based compensation creates a meritocracy where the companies that truly add value will rise to the top—and that's good for the marketplace. This approach also creates a sense of discipline for the marketers because they must think about the business objectives that drive desired results.

Is it possible to make CPDO a reality in digital? Yes, I think it is, and it's where we need to lead the industry and drive innovation. We should be moving to a model where we charge money only if advertisers actually achieve their desired goals. The benefits are manifold but will drive much more effectiveness, profitability and innovation.

My recent discussions with peers at this year’s All Things Digital conference give me a great deal of confidence that we will see much more innovation in this space in the next five years than we have seen in the past five years. So far, we have just scratched the surface of the opportunity.

Unlimited Marketing Budgets?
Another reason the CPDO model is good for everyone is because, at least in theory, it means that an advertiser's marketing budget is actually unlimited (until the marketer reaches supply constraints). Think about it: if the advertiser is paying based on the desired outcome of X dollars of sales having attractive profit margins, for example —paying a percentage of revenues—then the more the sales, the more advertising budget there is to spend. It's a good deal all around.

Any company that does not have the CPDO aspiration in “performance marketing” (and brand marketing should be included in this aspiration) will be extinct or disrupted at some point—you can't fool all the people all the time, as Abraham Lincoln once wrote.

Next in Part 4: Playing for the end game: Monetization nirvana.

Playing for The End Game: Monetization Nirvana
As I have written in previous entries to this digital advertising and monetization series, the challenges for companies today in reaching and influencing consumers are many and varied. The traditional marketing funnel is dead. Consumers are now in control of their digital experiences (which, by the way, has a significant impact on their offline behavior as well), not passive recipients of messaging. Both good and bad brand associations can spread quickly and virally, often before chief marketing officers have had their first cup of coffee.

In this environment, how can companies monetize their digital services to grow revenue and profitability?

To fully understand the magnitude of the opportunity we quickly have to jump into the user's perspective or mindset. Companies have to do two things for the user: (1) be highly relevant and then (2) find acceptable ways to charge the user in an optimized, customized way:

Be Relevant
A key imperative is to be highly relevant to a consumer's interests and pain points. You need to do more than just solve a problem for the user; you need to solve a relevant problem. One-size-fits-all is not good enough anymore; as a matter of fact we are seeing an increased fragmentation of experiences into ever-smaller, very targeted bits of value creation to the user (think, "iPhone apps"). For users, it's becoming increasingly easy for them to take matters into their own hands, re-composing their overall end-to-end experience into something meaningful and relevant to them.

Media consumption patterns are increasingly highly fragmented. You're competing with almost innumerable platforms and channels, so you just don’t get significant user mindshare if you are not highly relevant all the time, at every point of interaction. In fact, it's even worse than that: your failure to be relevant will affect consumers' perception of your brand, and that negative brand association will spread virally. Irrelevance says something loud and clear to the consumer: “I am ignorant and I don’t care that much about what you want." Traditional marketing that fails to be relevant to the user will face accelerated extinction.

The Consumer's Mindset (Figure 4)
Consumers are concerned with whether a digital experience is relevant to their needs, pain points and interests. The good news is that consumers are increasingly willing to pay for relevant experiences that add value to their lives.

Optimize Around Willingness to Pay
If relevance to the consumer or user is high, we are finding that people are increasingly willing to pay—through subscriptions, for example, or on a "pay-per-play" model. We're also seeing that micro-payments for virtual goods (buying assets in a virtual-world game, for example) is also finally catching on after a few failed early attempts. In fact, companies like ChangYou and Tencent, with its QQ service, are good arguments for the belief that virtual goods are a multi-billion dollar market with high growth potential.

The future will bring more fragmentation of revenue streams since technology will increasingly address the challenges of micro-billing in a multi-channel environment. We will therefore be able to move away from one-size-fits-all monetization models towards customized pricing that doesn't leave money on the table.

Apple, for example, has recently announced “in-apps”—payments for the iPhone that allow developers to not only charge for apps through the app store when an application is purchased, but also for micro-transactions as a consumer uses an app (let’s say to pay for virtual goods during a game). The combination of innovators like Apple and developer networks will unleash a dramatic wave of innovation to business models, leading to much more fragmentation but also more opportunities for companies to monetize their services beyond advertising or “commercial messaging."

Mastering both relevance and willingness to pay can lead to product or service success stories that allow for high margins on a sustained basis. These cases don’t have or need an additional value proposition to a marketer that enables generating additional revenue streams through “commercial messaging.” By itself, this is already a very attractive space to be in.

However, where I think the future lies—call it “monetization nirvana”—can be described as the intersection between (1) a paid model based on high relevance to the user and (2) a performance-based model (e.g., CPDO) based on achieving the desired outcome for the marketer. Both models generate value to stakeholders without trade-offs; as a matter of fact, they reinforce or even strengthen each other, if executed the right way.

Monetization Nirvana (Figure 5)
As the chart below indicates, consumer experiences and marketing that is not relevant to the user will face accelerated extinction. Product/service success stories represent a more compelling model. The greatest success, however-monetization nirvana-will be in the space where the publisher connects the revenue streams (the ones targeted at the user as well as the ones targeted at marketers) with reinforcing mechanisms that benefit each other in a way that improves the quality of the service.

Monetization Nirvana: Relevant and Targeted
I believe that the new and disruptive innovations that will drive significant revenue and profitability will be in the area of mass-personalized experiences and targeted marketing which results in very high relevance to the user. These are the most important opportunities to influence consumer behaviors.

For example, consider "Twitteriffic," an iPhone application that allows users to manage their Twitter activity on an iPhone. When the app is downloaded for free, it includes ads presented every 50 tweets (a tweet is a message sent through Twitter). Alternatively, a user can pay $9.99 for the service without ads. But consider the implications of that kind of pricing model: it presumes that ads are actually a disruption to the experience, so the user needs to make a trade-off. Today that may be true. At this point I have seen little if any relevant targeting and relevance of ads in the context of tweeting, but this can change quickly since there is massive data available that can be leveraged.

Here's a better way to think about such a service: Given available behavioral and social data on Twitter, as well as the capabilities to target messages to those behaviors and other insights, Twitteriffic and Twitter (with its increasingly powerful ecosystem) could eventually transform its “ads” into something that adds value to the user as content (with clear and transparent labeling, as best practices dictate). That way users would not want to miss the commercial message since it would actually help them pursue their interests. Twitteriffic could advance toward “monetization nirvana” by being able to charge for the app as well as for the commercial messaging. Because the commercial messaging could be effectively targeted at particular user groups, it would yield premium pricing.

Monetization nirvana is therefore best described as the space where the publisher connects the revenue streams (both the ones targeted at the user as well as the ones targeted at marketers) with reinforcing mechanisms that benefit each other in a way that improves the quality of the service.

By the way, Twitter and its emerging ecosystem might be the first serious disruptor to Google: Why? The combination of the following three attributes has disruptive power:

• Micro-publishing/blogging (change of communication and consumption behavior).
  
  
• Insights into social graph (insights about the user’s social connections).
  
  
• Change in the way Twitter users look for information (filter of trusted peers) and the way they find information (real-time, no latency).

Twitter manifests search on the derivative of peer-filtered content and trusted social connections in real time. With its emerging solution and penetration, Twitter can bring the machine algorithm and the human art of search together in a unique way.

The most important takeaway ideas here: You only reach monetization nirvana if you are able to be accountable for outcomes. And you are only accountable for outcomes if you are able to measure and continuously optimize along the relevant dimensions of the user experience and the value proposition for advertising or, as I prefer to call it now, "commercial experiences."

Next in Part 5: Moving away from guesswork: Addressing fragmentation with analytics and continuous optimization."

Moving Away From Guesswork: Addressing Fragmentation With Analytics and Continuous Optimization
One of the themes I've been emphasizing in this series is increased fragmentation, by which I mean several things—fragmentation of:

• Engagement Platforms such as devices (e.g., the iPhone) and services (e.g. Twitter, Facebook) driven by changing media consumption patterns online and offline.
  
  
• Content Types such as user-generated content, premium content, short-form video, long-form video, etc.
  
  
• Delivery Formats such as widgets, websites, blogs, RSS feeds, tweets, etc.
  
  
• Units such as ad formats, sponsorship units, campaign formats, etc.
  
  
• Pricing Models linking bits to payments for both user revenue streams (e.g., subscriptions, in-apps payments by Apple or other micropayment platforms such as Playspan) as well as commercial-messaging revenue streams (e.g., CPDO-based models).

From Fragmentation to Science-Based Optimization (Figure 6)
Fragmentation and complexity require developing new capabilities in science-based optimization of the user experience and marketing performance.

The explosion of devices and channels, and the different ways to access an ever-increasing supply of content, have strained ordinary modes of user and usage analysis past the breaking point. To successfully execute and monetize digital services in general—as well as digital advertising and future forms of monetization through “commercial messaging”—companies need stronger, science-based analytics capabilities that generate insights into customer preferences and desires. Better analytics tools, methods and approaches can enable companies to embrace fragmentation on multiple levels and then tie outcome-driven strategy and execution together in effective and actionable ways. This is not a trivial problem to solve, from either a technical or a business perspective.

The quality of information and data is also critically important to the value of the insights generated. Analytics are only as good as the data that is used. In our experience, companies that are more advanced in their analytics capabilities have attained a high degree of granularity, quality and timeliness in their data. Near real-time data generation and access is becoming increasingly essential. Companies also need the organizational and decision-making structures that enable them to act quickly on the insights generated.

These analytics capabilities, in turn, enable companies to continuously optimize the user experience. This kind of optimization requires mastering three complementary things:

• Master how to be found: Continuous optimization of how users locate a digital experience that advances your company's business value is increasingly a matter of how the digital experience is architected and built. In addition, the importance of search today means that companies must leverage search engine optimization (SEO) in addition to search engine marketing (SEM), among other elements in the marketing mix. These kinds of analytic approaches have a considerable impact on profitability and in some cases on the viability of entire business models. The science behind things like mass-personalization and optimization of landing pages is still in its infancy but holds tremendous potential—which leads to the next point.
  
  
• Master how to influence the desired actions of the user to drive profitability: Companies must also continuously optimize the user experience so that it always reaches the highest level of perceived relevance in a mass-personalized scenario. The one-size-fits-all approach that is applied in so many cases today will not drive differentiation and thus increasingly represents a risk to the brand. High perceived value to the user will be rewarded by the ability to be paid for services—either directly (e.g., subscriptions) or indirectly (e.g., micro-payments for virtual goods). High perceived value to the user will also allow for increased positive influence of offline behavior. Also, optimized user value is the basis for the marketers’ value proposition—which leads to the third requirement.
  
  
• Master how to deliver the marketers’ objectives to drive profitability: This concept refers to the continuous optimization of marketing performance to the marketer with both the "ad unit" (for lack of a better word, since "advertising" might be the wrong expression here) as well as the pricing model behind it (e.g., Cost per Desired Outcome or CPDO—see Part 3 for more about CPDO). This kind of optimization will allow for accelerated innovation in digital advertising as we know it. Just think of Google Wave or Microsoft’s Bing, two initiatives that were announced just recently. Behind those new experiences hide massive opportunities for business and revenue model innovation that are truly analytics- and data-driven—adding value not only to the marketer but also to the user.

All three opportunity areas represent the winning ingredients to successfully capitalize on the monetization nirvana described in Part 4. These ingredients have to be operationalized at scale across the ever-growing cloud of services and data if they are to have a significant impact and positively influence the bottom line.

Tomorrow’s solutions will enable companies to more easily manage sophisticated analytics and optimization platforms that will allow for accurate and relevant measurement as well as management of business outcomes in near real-time. In addition, these platforms will accommodate dynamically adapting objectives as demand and supply factors change, helping to create more agility in business and its underlying technical and organizational infrastructure and processes.

To summarize this "Digital Advertising and Monetization" series, the following are the major takeaways from my perspective:

• The end of the (marketing) funnel could mean the end of the (economic crisis) tunnel for the media and advertising industry if companies take risks and truly innovate (which means actively engaging in disruptive thinking rather than passively responding to it).
  
  
• Success today is about influence marketing. It's important to create opportunities for dialogue, which then influences choice.
  
  
• Value for marketers: Define ways to leverage the concept of “Cost per Desired Outcome”, or CPDO. Find ways to price the desired outcome and it will be harder to compete with you as long as you add value. Those who can out-innovate will win.
  
  
• Value for users: Make it easy to be found, then deliver a high degree of perceived relevance and value to drive desired outcomes. If you do, the user will be increasingly willing to pay.
  
  
• Encourage and enable experimentation at all levels and with all stakeholders. Explicitly define a way to break out of old, siloed ways of thinking.
  
  
• Invest in analytics and continuous optimization to basing investments on guesswork. Increased complexity and fragmentation mean that competitive differentiation will depend on the ability to continuously optimize with data-driven capabilities in near real-time.