The Risks of Display Advertising

Let’s face it, if you are selling products or services online, uncertainty is something that you need to get used to.

One of the biggest challenges that Ecommers face is the lack of ability to forecast their future performance, growth, and profits. We define goals, create strategies, and plan months ahead, only to find out how wrong our predictions were. Yearly planning changes to quarterly planning and then quickly to planning for the next day. One of the main reasons that ecommerce businesses face on-going turbulence is their extreme reliance on paid advertising. More specifically, advertising on discovery platforms. 

Prior to the last decade, most people have referred to paid advertising as PPC advertising, which is most commonly known today as Google ads. Things were more simple back then. Businesses advertising online had to worry about SEO, Google Ads, referrals and other smaller advertising platforms. In the last decade, things took a huge turn for advertisers.

Facebook Ads introduced a new way for businesses to generate revenue and customers, and the idea of only advertising your product to people who are searching for it became a thing of the past. The reason Facebook Ads are so effective is because of the amount of data they hold and the amount of information they know about every single user. Anything that Facebook users do on or off Facebook, they track it. Whatsapp, Instagram, Facebook, and almost every other website is being tracked by Facebook. Critics say that this is the worst thing to happen to the internet as we completely lost sense of our privacy and security; however, Facebook claims that this is what helped millions of advertisers become successful. Facebook’s tracking mechanisms have introduced new industries and businesses that without these data and insights, would have never stood a chance competing against other large advertisers. The point of this article is not to discuss Facebook’s actions or motives, instead it is to discuss the opportunities it created and the risks associated with it. 

Platforms like Facebook, Instagram, SnapChat and Youtube have created opportunities for users to discover products or services that they might be interested in. For advertisers it means that you’re able to target users who aren’t actively searching for your product, but might be interested in it. The biggest advantage of advertising on such platforms is the absence of direct competition. Think about it, If I am selling sports shoes and I want to advertise for people who are searching for a keyword such as “2020 running shoes online”, and I am advertising on a direct search platform like Google, I can find myself competing with large brands like Nike or large department stores that can easily push me out of the platform because they are more powerful and more efficient than I am in terms of advertising. Yet with discovery platforms like Facebook or Youtube, I can find the same user at a different time or different place, for a much lower cost. If advertisers don’t compete for the exact same space, the cost to advertise will be less competitive. 

Both discovery platforms and direct search platforms price their advertising space using the same model, based on CPM or cost per mile. This represents a cost of delivering 1000 ad impressions served to users. The way that they distribute these impressions are different. With direct search platforms, it’s more simple. Advertisers pick the keyword they want to target, select the desired demographics, and directly compete on the people who are searching for that keyword. The biggest drawback here is that it can skyrocket the cost to reach these users. It becomes an open battle between advertisers and whoever is willing to pay most to reach these users ultimately wins. That’s how a single click can potentially cost advertisers as much as hundreds of dollars. Platforms like Google won’t go out of their way to facilitate that cost as it obviously makes them more money, but it can raise a concern if the overall revenue from ads drops or if more advertisers are looking for a more cost efficient way to generate revenue through platforms like Facebook or other discovery platforms. 

With discovery platforms, the way the cost to advertise is set is different. Because on discovery platforms, we’re not targeting what users are searching for, but what they might be interested in. The advertising platforms play a major role in finding and pricing the cost to advertise.

The basic logic of discovery platforms can be summarized in the following way: Instead of telling us who you want to reach and when, tell us what you want to achieve (set your goal: such as getting a purchase, generating an email sign up, etc.). Then, once you start getting conversions (sales or sign ups), the advertising platform will start finding similar people with similar characteristics or similar online behavior. In other words, don’t tell them how you want to advertise, tell them what you want to achieve and they will automate the rest.

If I am selling sneakers, then I can’t be spending thousands of clicks until I figure out who might have an interest in purchasing my product. Instead, the cost per impression is regulated by the audience that these platforms think are most relevant for your product. In order to give you the most relevant results possible, platforms like Facebook use an AI algorithm that finds people who will most likely be interested in a product similar to mine. Remember that they have access to what FB users do on and off Facebook. They can easily create a target image of what their users are browsing for, what they like,  and what they might be interested in. Then, based on the demographics and location you select, they group audiences based on the most relevant matches and automate exactly who you reach. The more advertisers want to reach a specific kind of audience (such as women in new york, who are 25+ and like to shop in designer brands), the higher the cost will be. 

As an advertiser, aside from the demographics and location, you’re pretty limited as to how much control you have over who you target. Even if you don’t have any conversions yet, these platforms have other ways of reaching your audience and finding out who is most likely to have interest in your products. They can start by filtering first who responds to your ads, clicks on your ads, or even browses your website. Then, they start fine tuning and slowly creating an advertising image of your customer persona. 

A good example of how all this works can be the following:  Imagine having an ad banner in the middle of a busy highway. Each time a car passes by, you are charged for an ad impression. Think of how many wasted and irrelevant impressions you would be serving. Most will be to users who will never be interested in purchasing your product. Now, think of how the ads are served on discovery platforms. Instead of showing your ad to every car in the highway, only cars that meet your customer demographics will see the ads. Then, only similar people who had shown interest in the banner will see the ad, and finally only similar people who actually called the number on the banner or made a purchase through seeing the banner will see the ads. That’s why they are called discovery platforms because they allow people to discover new products or services that they might be interested in. Unlike traditional media (TV or Radio), discovery platforms only want to show ads to people who are likely to care about the product as they don’t want users to feel spammed and feel like their newsfeed is an ad feed.   

Discovery platforms like Facebook, Instagram, Snapchat and Youtube deserve credit for creating new niches and giving the growth opportunities for businesses that couldn’t afford the high cost of direct search. New industries in ecommerce have been created such as one product shops, dropshipping retail websites, info-products businesses, and others. The idea that you can filter through millions of people in a matter of a few dollars of advertising spent has not only been extremely efficient for advertisers, but also has become the most powerful and effective way to advertise. 

Although discovery platforms have created new ways for businesses to grow and new industries to be born, there are some disadvantages that should be addressed. Aside from the privacy violation, which I don’t think we as a society understand the true implications of how far this will go, I think that from a business standpoint there should be concerns as well. When businesses are formed as a result of a new advertising or paid reach opportunity, they depend on it. Like in nature, animals, plants, and even humans depend on natural resources to exist. If the natural resource becomes more scarce or extremely limited, then there is a threat to our existence. Businesses have built their entire model based on the cost to advertise on discovery platforms. They price their products or services based on their current marketing costs. They have margins for error and expect their advertising cost to go up and down based on supply and demand. What they don’t expect and don’t have answers to, is extreme changes. 

Consider this example: I am selling sneakers and it currently costs me $1 to get a visitor to my website as my products are trending and there is a good ratio of users who are seeing my ads are clicking and buying. I will scale and grow my store to as much as I can because I am profitable. Along with growing my sales, I will grow my operations, my facilities, and try to grow my business in the most effective way possible. My dependency on paid advertising on discovery platforms will continue to grow as no other traffic source will be as effective. Then, with time, the same people will start seeing my ads again, the cost per impression will continue to rise as the demand in the market becomes more competitive, and my cost to bring a user to my website will start to increase. First it will be $1.25, then $1.50, and then $2.00. Before I know it, my marketing cost will double and my business will turn from being profitable and growing, to a business in risk of closing because of an unexpected increase in marketing costs. That’s why businesses that understand the danger of relying solely on paid advertising (both direct search and discovery), invest massive amounts of resources into generating alternative traffic sources, relying on their customer base, and developing other organic traffic sources that will take off weight and reliance on paid advertising. Then, when the cost of advertising for a specific source increases, they are able to alter their advertising budgets towards other sources to facilitate the rise and remain profitable.

The analogy that I like to use for paid advertising vs organic traffic is the following: Paid advertising is like renting a nice and expensive house, as long as you are paying, you will have a great time. The day that you can’t afford the rent you will be kicked out and left without a house. It doesn’t matter how much you paid or how expensive it was, if you don’t make rent, you’re out. It’s like you don’t exist. With organic traffic or organic advertising, it’s like being the landlord. You invest in building the property and developing the land. You don’t see the return on investment until years later. That being said, you own the real estate. You will continue to generate returns in the long term and the payoff for your investment will be better in the long term. 

In Summary

Display advertising has changed the game for Ecommerce. It certainly has its advantages over traditional and direct marketing, but comes with a risk. Reliance on display advertising can lead to dependency, and as the market becomes more competitive, can drive the price of advertising so high that it obliterates profitability. Using display advertising in conjunction with other forms of advertising such as organic, traditional, and building a lasting customer base will hedge your risk and allow your business to continue thriving during times of uncertainty.