Economic Doom-And-Gloom and the PPC Industry

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February 15th, 2008 by Click Consult

Ad-spending usually plummets when economic growth slows. Indeed, as stockmarkets tumble and economies falter, some ad-men expect the knife to cut deeply in 2008 and even more so in 2009. However, advertising budgets may prove more resilient than many analysts think. This is because the internet has brought greater accountability to advertising. With Pay-Per-Click (PPC) advertising, for instance, you can now prove that a click on a sponsored link ad produces a sale. Firms are trying to impose the same discipline on other media spending. I came across a company recently who told me about a separate phone number that they only use for their TV ads and nothing else. By measuring the volume of calls via this phone number, they get a sense of their ROI from television advertising.

“Now when companies raise their budgets they do so more responsibly,” says Jonathan Barnard, head forecaster at ZenithOptimedia, a unit of Publicis Groupe, a French advertising firm. “They're less likely to see marketing as a frivolous expense ripe for cutting”. Other forecasters disagree about advertising spending in 2008. UBS, a bank, predicts that expenditure on ads will increase by 5%, whereas Goldman Sachs, a rival, forecasts that it will decline by as much as 5%. However, most forecasters concur on one thing: underlying growth in ad spending will come mainly from advertising on the internet.

The internet is claiming a growing share of advertising—at the expense of traditional media, such as TV and print. There is still a gap between the time people spend online as a fraction of their media consumption (about 20%) and the fraction of marketing budgets spent on the internet (about 7.5%). Many companies are trying to narrow the gap, which will sustain internet advertising during a downturn. Search advertising, the most effective kind of all, should be safest.

Indeed, some people say an economic slowdown is likely to accelerate the shift to the internet. Trevor Kaufman, chief executive of Schematic, an interactive agency, says that one of his clients, an American “big-box” national retailer, intends to devote more of its marketing resources to the internet as the economy slows. The internet's interactivity and wealth of product information make it the best means of generating short-term sales—whereas television is best for long-term brand-building. During a downturn clients see internet ads as easier to measure and hence easier to justify to shareholders, says Mr Kaufman.

But online advertising cannot hope to escape an ad recession altogether. Deloitte, a consultancy, argues that online ads face new obstacles. It points to a recent survey of American consumers which found that more than three-quarters of respondents said online ads were more annoying than those in print. Concerned about their privacy, people have also started to lobby against online tracking of sales, which is a vital element of the internet's much-vaunted effectiveness.

Some industries will cut ad-spending more deeply than others, says James Walker of Accenture Marketing Sciences. Many banks, hit hard by credit crunch losses, have already cut back on their spending. Makers of cars and luxury goods and other dispensable items will be more exposed to a recession than companies that sell necessities.

The Economist (24/01/2008).

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