I just had a quick scan through a  report by JP Morgan’s Internet analyst Imran Khan, titled Nothing But Net, released in January 2008.

In an almost throw away line, he notes that "[m]ore than 80% of online inventory currently sells for less than a $1 CPM," with an average CPM rate of just $US3.31 for display advertising in 2007.

As indicated in the two charts below (the first showing the global market, the second the US market), while rates are forecast to lift in coming years, they won’t do so by any order of magnitude.

 

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I found these figures quite surprising, given that in several recent projects, clients were forecasting (and, based on trading history, expecting to secure) CPMs ranging from $A30-$A70.

There are a number of contributing factors that create pressure on CPMs for display advertising, with the primary two causes being:

– A glut of non-premium advertising inventory (as mentioned previously, sites like Facebook are generating so much traffic that it completely devalues their inventory)

– Low adoption of ad targeting platforms and other revenue optimisation techniques.

But how did it come to pass that display advertising rates have slumped so low?

The rise of ad networks, which aggregate unsold/distressed advertising inventory and sell bulk quantities at low rates to advertisers who are happy to run "spray and pray" campaigns, is certainly a factor.

Another factor is that marketers expect a much higher correlation between digital marketing activities and confirmed sales than they do in any of the ‘offline’ media, which I have also covered previously. This is quite ironic, yet by viewing online marketing as undifferentiated from other types of direct response campaigns, marketers have driven CPM rates down.

However, the main reason why CPM rates for display advertising remain at such artificial lows is that publishers (and the online industry in general) have still not developed a compelling story for advertisers when it comes to achieving ‘best practice’ for display advertising in online brand/branding campaigns.

With the dominant mindset among marketers being that the online environment is a sales-focused medium and, consequently, the aim of online campaigns is to secure reach, they buy based on tonnage: how many impressions will you deliver for my budget?

Publishers need to start the process of educating marketers about engagement and, in particular, the types and degree of engagement that can be achieved within an online, interactive environment that could never be achieved in other, display-like mediums (such as newspapers, magazines and TV).

Importantly, publishers need to get marketers thinking about how online advertising can be better utilised to achieve brand awareness, interest and preference. Marketers need to recognise why online advertising should be part of the marketing mix at all stages of the purchase cycle, rather than only at the ‘buying’ stage.

The first step in this process is to get everyone on the same page as to what ‘engagement’ is and, importantly, how you can tell whether you have it (yes, another metric!).

The second step is to recognise that the ad units themselves need an overhaul. Display ads have been around since the very first Web browsers were released (some 15 or so years ago). This might lead you to think that they are now a ‘mature’ product. But display advertising is still a very young format, when you consider how long print and TV advertising formats have been around. There is still plenty of opportunities to refine and evolve the advertising formats themselves.

Lastly, publishers need to recognise the importance of creating and sustaining their own brands. Having a well-defined, understood and trusted/respected brand is key to achieving engagement with audiences. Furthermore, publisher’s brands create the opportunity and the context for introducing advertisers (and their brands) to the audience.

All too many publishers fail to adequately engage with their own audiences and nurture their relationships. Until they solve this part of the equation, they will be hard pressed to improve advertisers’ perception of value for their advertising products.