Apt White Paper Internet Advertising

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1. Internet Advertising:How Online Ads Can Affect Offline Sales apt ViewpointAuthor:Scott Setrakian Managing DirectorJonathan Marek Senior Vice President San FranciscoWashington, D.C.Londonwww.predictivetechnologies.com 2. abstract AbstractA mother wants to buy a backpack for herchild who is starting first grade. She logs ontoan Internet search engine (such as Yahoo orGoogle), and runs a search on the words childsbackpack. The search engine finds several hundred thousand different web pages thatcontain those words. When the search results are presented, links toseveral websites are displayed prominently atthe top of the page and along the right hand side.These links lead to relevant websites that paid thesearch engine for the right to appear prominentlyin front of anyone who searched for certainkey words they are advertising sponsors. The mom clicks through on one of the sponsorwebsites, finds a backpack that suits her needs,and buys it online. This is the heart of Internet advertising. Searchand its cousin, Banner (display ads posted ontargeted websites, such as an ad for backpackson a website about child raising), represent about7% of all ad spend today. Search and Banner arewidely believed to be rapidly stealing share frommore traditional advertising media. Internet advertising is especially attractive toadvertisers because the economic proposition 2is clear for online sales. Click-throughs areautomatically recorded for each ad, and resultingsales are directly captured. Calculating ROIbecomes a straightforward task, comparing the 3. cost of the ads to the profits from the online sales that result.Measuring the OfflineImpact of Online Ads Internet advertisers who do business in both the online and traditional brick-and-mortar storeIn a typical test, APT partners with a companyStores in test markets channels have recently started to ask a new setto design and launch an online campaign to awith Search ads had asubset of web users in carefully selected test of questions: Do Search and Banner ads also increase sales in the physical store network? Do markets, while leaving other control marketsstatistically significant lift customers buy more at a brick-and-mortar store dark. APTs Test & Learn Management in sales overall, a result after seeing Internet advertising? For example,System then tracks the differences in store might the backpack-seeking mother visit a storesales between the test and control markets, that produced attractive that she saw advertised online, having learned and performs sophisticated analyses toreturns to the advertising that the retailer had good candidates, to examineidentify the impact that the online advertising the backpack options herself and decide in has on sales in the store network overall.campaign. Sales of both person which one to buy? Might she seek out aAPT also identifies differences in performancethe advertised product, well-reviewed brand at a local store, so that she doesnt have to wait for delivery and can have it in that are correlated with different store and market as well as other, more time for the first day of school?characteristics, and different ad elements. Theprofit generated by the online advertising isimpulse buy items, The implications of these questions arecompared to its cost, creating a true read of increased significantly. important. If Internet advertising creates the ROI of online advertising offline sales. even more value than the margins driven by incremental online sales, it then represents The initial results are compelling: a more attractive advertising medium than previously thought, and for a larger pool of n Online advertising drives in-store revenue potential advertisers. lift in all instances analyzed to date. For aretailer or consumer goods company that To better understand the offline impact of onlinesells in both online and offline channels, advertising, Applied Predictive Technologies (APT) the value of Internet advertising is likely is collaborating with selected leading retailers,greater than the value of online lift alone; banks, and consumer goods companies on an online to offline Test & LearnTM initiative. n The degree of in-store lift varies from case 3to case. In some examples, the in-storelift drives attractive returns to the Internet 4. Case StudyAPT worked with a US-based specialty retaileradvertising expense all by itself, without any to analyze the impact of Search advertisingprofits created by new online sales. This on in-store sales. A Search campaign wasmeans that the Internet can be a profitable implemented in selected markets, and theadvertising channel for retailers and consumer change in performance of the stores in thosegoods companies that sell predominantly test markets was compared to the changethrough brick-and-mortar networks, regardless in performance of stores in control markets,of the extent of their online presence; where no Search advertising campaign was implemented. The Search campaign was n Advertising ROI often varies market focused on key words relating to a specific by market, leading to opportunities to product line. The retailer was interested in maximize Internet advertising returns understanding what would happen to sales through intelligent targeting; in its stores overall, to sales of the advertised product set, and to other product categories. n Internet advertising ROI varied on the basis of products advertised. These This may sound like a simple analytical task. differences are unique to each advertisers However, measuring small changes in sales at concept and merchandise mix; a store is much more complex than measuring changes in click-thrus on a web page. The n Search and Display advertising behave complication is rooted in the nature of store sales. differently, and have different returns;n With the results of carefullyFig. 1: Daily sales at a representative retail store: designed tests, advertisers can exploit opportunities to maximize their Search and Display ROI based on tailoring the message, intensity and ad type. 4 5. Daily sales vary by over 100% in any given weekIn the case of this specific test, the signal- and by well over 400% seasonally. However, to-noise challenge was exacerbated by a change of only 1.5% in daily store sales can Hurricane Ike, which brought significant drive terrific returns to Internet advertising.winds and rainfall to the middle of the country Accurately detecting a 1.5% change in sales in anduring the course of the test, impacting environment where sales change radically on asales at many test and control stores. daily basis, regardless of the Internet advertising, requires highly specialized protocols of testAPT applied sophisticated analytical approaches design, control group selection, and analysis of to mitigate not just daily variations in sales but results. This is known as the signal-to-noisealso the impact of the weather anomaly, in challenge. order to maximize accurate signal detection.APTs Test & Learn process (Figure 2), bringsThe results of the test were important for this highly specialized techniques to bear on the retailer. Stores in test markets with Search problem of reducing noise and finding theads had a statistically significant lift in sales true attributable impact the signal of the overall, a result that produced attractive returns activity under examination.to the advertising campaign. Sales of boththe advertised product, as well as other, moreimpulse buy items, increased significantly. Fig. 2: APTs Test & Learn Process 5 6. Ongoing WorkThe return profile improved dramatically with detailed evaluation ofAPT is working with a number of retailers to understanddifferential performance by store. APT identified certain market attributesthe impact of online advertising on offline sales.that were associated with proportionately greater sales lifts than theAdditional research addresses such questions as:overall average, including trade area per capita income (Figure 3). n Can online advertising replace or enhance weeklynewspaper inserts (also known as Free Standing Fig. 3:Inserts (FSI), Weekly Supplements, etc.)? Howdoes Internet advertising ROI compare to FSIROI - overall, by market, and by week?To address this issue, APT is working with large Sales Lift Index retailers who use FSI to investigate the relative effectiveness of Internet advertising under a variety of combinations of FSI / Internet use; n How does Internet advertising fit into thelarger framework of ad media alternatives,including TV, radio and print?To address this issue, APT has collaborated withIn other words, stores in trade areas with average per capita income several retail and consumer goods companies togreater than $33,000 saw sales increase 4% when Internet advertising design and execute experiments that evaluatewas underway. The Test & Learn approach provided the retailer with a Internet advertising as one component of ameans of targeting its ongoing search campaigns, investing only in those strategy that incorporates traditional advertisingmarkets that would perform best. As a result, the retailer was able to media, in order to determine which combinationscale back advertising costs in low impact markets, while maintaining is most effective. Results to date show thata large majority of the lift, and thus significantly improving ROI. Internet advertising plays a meaningful role in an optimal media plan, when results includeContinuing Test & Learn evaluation can continue to build on these findings lift accomplished at the store level.and drive a refined, highly profitable Internet advertising program. 6 7. Concluding ThoughtsScott Setrakian,Managing Director Jonathan Marek, Senior Vice President The emergence and continuing growth of onlineMr. Scott Setrakian is Managing Directorand co-founder of Applied Predictive Jonathan Marek, a Senior Vice advertising media offers consumer-facing advertisersTechnologies (APT). Mr. SetrakianPresident with Applied Predictive the opportunity to improve sales and margins cost-Technologies (APT), leads effectively. The online channel drives sales and profits has over 20 years experience advisingmany of the worlds largest and most engagements with casual dining, not just for online stores, but for brick-and-mortarquick service restaurant, specialtysuccessful companies. His work focuses locations as well.retail, big box retail, and bankingon the development and implementationof strategies and processes that lead to clients. He has helped clients improve Through intelligent testing, marketers can understandsignificant improvements in profitabilityperformance through better capital the ROI of online advertising across all sales channels. and corporate value. He has led the work strategy, new concept development, Expertly done, testing can also help target online of hundreds of management consultantsmedia optimization, store labor advertising to the best alternative (e.g., search vs.in engagements in over 20 countries on six planning, site selection, and store- banner), the best products, and the best frequency, to continents.based goal setting. maximize the effectiveness of ad spend.Prior to co-founding APT, Mr. Setrakian satMr. Marek has ten years of experience For insight into how Internet advertising can driveon the Board of Directors of Oliver Wymanapplying quantitative techniques sales for your company, or to learn more about this(formerly Mercer Management Consulting), to critical business issues. Prior toone of the worlds largest general joining APT, he was a Principal at groundbreaking research, please contact APT atmanagement consulting firms. He led theOliver Wyman (formerly Mercer 703-875-7700 or info@predictivetechnologies.com.firms consulting activities in the Energy and Management Consulting), where heProcess Industries around the world. advised multi-unit retailers on new business strategy, network planning, About Applied Predictive He currently sits on the Boards of Directors and operational process issues. At Technologies of APT, The Buena Vista Funds, UniversityMercer, he drove several field-based change efforts with Fortune 500Games, the San Francisco Zoo and theSaroyan Foundation.companies. He has led engagements Applied Predictive Technologies (APT) is the industry across North America, Latin America, leader in helping large-scale consumer-focusedand Europe.Mr. Setrakian holds a MBA from the companies institutionalize a world-class Test & LearnTMStanford Graduate School of Business. capability. Through the combination of APTs proprietaryMr. Marek holds a B.S. inHe received an AB in Human Biology software and capability-building consulting support,mathematics (with Honors andfrom Stanford University, where he also APT has helped some of the worlds largest and most Distinction) and an A.B. in philosophy 7completed the requirements for a degree in successful companies achieve significant bottom-from Stanford University, where hePsychology. line improvement. graduated Phi Beta Kappa. 8. 8