May 20, 2007

Branding ads and ad listings

I just saw this post on BoingBoing about this ars technica post on the psychology of banner ads which is interesting in light of Google's and Microsoft's recent acquisition of 'creative/banner ad' networks.

"The research concludes that repeated exposure to a product via banner ads generates a positive feeling towards that product. The good news for consumers is that a critical reevaluation of the product can make these positive feelings vanish." and
"This suggests that familiarity-based advertising may work best for impulse buys, where more detailed evaluations aren't likely to occur."

I found these two papers yesterday when reading up on economic theory and internet advertising. This one Internet Advertising and the Generalized Second-Price Auction - Selling Billions of Dollars Worth of Keywords is the most readable of the two and talks about the bidding process for online ad placement. They cover the history and describe the shift from "pay what you bid" to the current "pay the next lower bid" (called a 'generalized second price auction'). Really very interesting stuff.

The second paper Brand and Price Advertising in Online Markets looked at different fundamental forms of advertisements - brand advertising and 'price' advertising. I had high hopes for learning from it, but it was very dense with too much lingo specific to this research area for me to fully understand. Here's an example: In contrast to models where loyalty is exogenous, these crosschannel effects lead to a continuum of symmetric equilibria. Yeah, I, uh, was thinking the same thing.

Their models and assumptions also seem questionable and so I don't know that their results apply to the world we live in, as opposed to the simplified models they used to prove their theory. In any case, the questions being asked and the attempt to find answers are still valuable.

Here are their findings (and again, these may not really apply to the real world)
While each firm finds it optimal to advertise its brand in an attempt to “grow” its base of loyal customers, in equilibrium, branding (1) reduces firm profits, (2) increases prices paid by loyals and shoppers, and (3) adversely affects gatekeepers operating price comparison sites. Branding also tightens the range of prices and reduces the value of the price information provided by a comparison site.
Their research shows that brand advertising allows a firm to have higher prices, since loyal consumers aren't as price sensitive, but their conclusions are that profits are less - which I don't understand, unless the cost of creating the brand is very high. The Ars Technica post shows that other research continues to confirm that viewing brand ads creates a positive impression, which is one step towards converting shoppers into loyal customers.

This got me thinking about the various forms of advertising. The second paper distinguishes 'brand advertising' from 'informational advertising', which I agree is a useful distinction. I think of it in terms of how actionable the advertising is - how delayed is the payoff. For branding, the payoff is very indirect but could be profitable (or not, depending on which research you subscribe to) due to higher prices or repeat business or cutting out the competition through causing the customer to not engage in comparison shopping. For ad listings that show a very specific product or category, which are often a gateway to a purchasing decision, the payoff is fairly direct. Some even feel that the advertising cost model may evolve into 'cost per action' and go beyond 'cost per click'. However, cost per click is currently much easier to gather metrics in a two-way trusted fashion than measuring the final transaction in a two-way trusted fashion.

Another example of a very actionable advertisement is the Amazon or EBay offer listings - these are immediately purchasable, and through syndication via Associates are widely used as advertisements. I don't know of any company that does placement optimization of Amazon Associate links (raising placement for offer with better click through rates, better commission for the associate, etc), but I think Amazon has started doing some of that with Omakase links. One interesting thing to consider is that both Amazon and EBay are similar to price comparison sites due to the large number of offers for a single authoritative item (EBay doesn't have very good item authority, but people work around that issue by using manual searches). Getting top placement on an Amazon offer listing page, or in the 'buy box' on the details page, doesn't use an auction bidding process the way Google or Yahoo paid search listings do. The offer listing position is based on the offering price and estimated shipping costs.

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