In 2020 online advertising is neither new nor under-analysed, and yet there remains a fundamental misunderstanding about the role it plays, says Grace Kite.

Businesses think that all digital advertising belongs in the same bucket as TV or posters, so they pay for it out of their marketing budget, monitor its return on investment and increase it at the expense of other channels.

This makes sense for some types of online ads, but others aren’t like traditional advertising. Their job is not to drum up demand. Instead, as a recent article in The Economist pointed out, they are “the new rent”. Now that e-commerce is so prevalent, fewer businesses need to maintain a physical presence with a high street shop, but they do need to maintain a virtual presence and that’s why they purchase these ads.

Their purpose is to help people who are already on their way to a business to arrive safely. They replace the sign above the shop front, the lights that stay on inside, the shelf-space, and even the entry in the yellow pages.

The data show that digital ads don’t drive new sales

My job is to estimate econometric models of individual firms’ sales, and these models often show that some types of digital marketing don’t drive incremental sales. Econometrics is not a perfect analytical technique, but ours are done to IPA-awards standards every time, and we believe the conclusion: these ads aren’t driving new sales, rather they are easing or defending sales driven by other things – price, the economy, and advertising on traditional channels.

The macro data points to digital ads being rent-like too. It shows that the rise and rise of digital advertising matches the rise and rise of e-commerce. Correlation isn’t causation, but its surely not a coincidence that the line in the chart below, digital share of spend, is heading north-east in parallel with the bars, share of retail that’s online.

Source: GroupM, ONS

And then there’s the evidence point that The Economist used – the reaction to this year’s recession. Drawing on US data, it reports that traditional advertising formats are down, but that online advertising is flat, or even up a little. It’s because “online retailers must maintain a visible presence, recession or not”.

Search is the obvious example, but it’s not the only rent-like digital “ad”

Byron Sharp highlights search-engine marketing as the archetypal example of rent-like digital advertising, or to use his terminology, advertising that is really “physical availability”.

How Google manages search ad sales proves his point. Advertisers pay Google for clicks, and any hypothetical search ad that set out to tell a story, convince, or otherwise build demand, might not convert straight away. Insiders report that this kind of search ad is explicitly not supported in Google’s auction algorithm.

This is not to say that all search-engine marketing is rent-like, as Faris Yakob pointed out when I contacted him. For relatively unknown brands, or existing brands that are launching a new product, search can drive awareness and, from there, new sales both now and in the future.

But it’s also not to say that search is the only example of rent-like digital advertising. Programmatic online video or display ads also often act to shepherd prospects to the final sale. People don’t react to these ads because they are particularly convincing, but rather because they present a convenient route to the check out.

Affiliates are another contender. Their cost is often bucketed as advertising and paid for out of the marketing budget, but they are much more like a shop front that happens to stock your product. As James Hankins put it in a recent blog: “what is the difference between them and Tesco?”

Rent-like ads shouldn’t be paid for from the marketing budget, they are operational

Righting this misconception around search and the other rent-like digital advertising has three important implications.

The first, and most important for CMOs, is that this is an outlay that shouldn’t come from the marketing budget. If some digital ads are simply a cost of existing in online sales channels, the expense should come out of the same budget that pays for the website and the building that houses the call centre.

In 2019, 49% of marketing budgets were spent online. If even half of that spend went to rent-like ads, it was likely a serious drain on CMOs’ abilities to build demand using advertising. This is one possible explanation for the IPA’s recent finding that effectiveness has been declining in awards entries. Perhaps advertisers are being forced to allocate too much budget to activities that don’t drive incremental sales.

The second implication is that there is a better skillset for managing these ads elsewhere in the organisation. What would an expert in sales channel management or merchandising do? Maybe they’d reduce spending on these ads to the level they used to spend with the Yellow Pages, or the amount that’s sensible for signage. A CMO would be well advised to head straight down the corridor to ask them.

And, finally, the analytics digital marketers use need an overhaul. At the moment they don’t separate rent-like ads from demand-building ads. They count everyone that walks past the sign above the door and claim everything they buy as driven by the sign. The challenge now is to move to a better system where analytics first identify which ads are rent-like and which are demand builders, and then stop reporting return on investment for the rent-like ones.

Perhaps then we could be certain whether or not we are paying too much rent.