We've been critical of Razorfish reports in the past and so must tip our hat to that digital team for its insightful Razorfish Outlook Report 2010 -- which not only lucidly addresses major trends in online marketing, such as the rise of ad exchanges, but also offers a candid peek inside Razorfish's own business.
One curiosity in the report, however, comes in the section where Razorfish discusses the impact of the 2009 recession on client media spending. Their clients, similar to yours if you work in the ad business, made the expected moves: shifting ad spend to direct-response channels, using discounting in messaging, moving more funds to paid search. Yet the big surprise was 48% of online ad spending was still placed on a CPM model -- the type of buy where you pay for impressions no matter who clicks on or responds to the ad.
CPMs stand for "cost per thousand impressions" and are one of the great artifices of the ad industry. They are fiction, you see, because most "impressions" don't really reach consumer retinas at all. In newspapers, readers do not scan every ad on every page; on television, the average U.S. household has access to 130.1 channels but tunes in to only 17.8. The rise of tighter measurement tools in radio known as portable people meters exposed the fact that consumers often turn the dial when :30 second radio spots come on -- news so bad that Arbitron, the radio ratings service, launched a PR campaign to try to convince ad agencies that fewer impressions were a better value! The vast majority of ads run in any media are never seen. CPMs, in other words, are a currency used to place a value on a media audience -- and just as a paper dollar has little to do with real gold, you should never confuse an impression estimate with an actual frontal lobe synapse firing.
On the web, pay no attention to measurement?
CPMs in the Internet arena are no different. One has to wonder, in the year 2010 when we can conceivably tag every computer browser and track responses in the forms of CPCs, CTRs, CPAs, conversions, even cost per sale, why nearly half of all online ad buys are still pushed through the weak CPM pricing system. This is no knock on Razorfish; our clients do the same thing, since the online marketplace demands it. The truth is there is huge resistance inside the industry by publishers, who aggressively (and fearfully) defend impression-based pricing structures which pull revenue no matter what the result. Online pricing schemes remain the Wild West of media -- it is possible to spend $60 CPM to reach an elite audience at WSJ.com, or $17 CPM if you negotiate shrewdly, or $6 if you are clever enough to lift the audience and chance them with retargeting. Ad networks can drive down costs even further to below $1 CPMs, and buys using the cost-per-click model remove potentially all waste in the top of the funnel. So what does it cost to reach 1,000 wealthy consumers online? A buck or 60 dollars, take your pick.
Yet CPMs persist. They are in fact a necessary defense for all content publishers, as the inventory of communication channels rises to infinity and switching costs fall to zero. The only way to make a margin with any material is to build in waste, and fight to keep that frictional source of profits. To paraphrase John Wanamaker, half the money you spend on advertising is wasted, and publishers really, really want to keep it that way.
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