The ultimate marketing machine

One of the most famous mantras about the uncertainty of advertising effectiveness is the quote from John Wanamaker, a US businessmen from the 1870s credited with inventing modern advertising. Buying space in newspapers to promote his stores, he mused: "Half the money I spend on advertising is wasted. The trouble is I don't know which half."

by The Economist
Last Updated: 30 Sep 2014

Over 130 years later, this conundrum continues to frustrate advertisers. The rise of direct marketing and more sophisticated segmentation has gone some way to eliminating the guess factor, but it is new advances in internet advertising that truly promise to show advertisers what's working and what's not.

In particular, the internet is allowing the rise of 'cost-per-sale' advertising – meaning that advertisers only pay when consumers actually buy as a result of clicking on the ad. The concept of 'cost-per-click' has been around for some time, but this takes it one step further. It promises to eliminate the Wanamaker paradox.

An innovator of this model is internet entrepreneur Bill Gross. It was Gross who came up with the idea of cost-per-click advertising, which 'inspired' the founders of Google to develop a similar model for AdWords – which has proven to be the driver of Google's astonishing advertising success.

Now, Gross has set up a search engine called Snap.com to put the idea of cost-per-sale into action. An airline advertising on the site, for example, will only pay for the ad when a consumer clicks its link and buys a ticket. Google is also exploring the idea and its new Google Checkout is partly designed to discover more about consumers who click on ads and then go on to make a purchase.

If, through new internet models like this, marketing can become more performance-based, then it can cease to be a cost-centre, assigned an arbitrary budget, which is often the first thing to be cut when business is bad. Instead, marketing has the chance to become a variable cost of production that measurably results in making more profit.

Experts also argue that if the web is truly a performance-based advertising medium, companies can use it to advertise far more of their inventory. Instead of focusing spend and attention on their 'star' products – companies tend to advertise only 5-10% of their wares – advertisers can put each product into the internet's infinite digital stream. This is called exploiting the economics of the long tail.

That, surely, is something the waste-averse Wanamaker would have approved of.

Source: The ultimate marketing machine
The Economist, July 6 2006

Review by James Curtis

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