Paradigm Shift in Online Display Advertising

When Larry Page and Sergey Brin started Google, it merely was a search engine. For years, Google focused ruthlessly on its core functionality which was the mathematics that drove the algorithm, which produced the most relevant search results. Their success started producing all the traffic they could handle. But the noticeable thing was that they didn't sell anything. Then in 2002, it happened. Keyword based text ads started appearing along the right column of search results and then they launched the game changer Google AdWords program. Suddenly lots of traffic was getting converted into lots of revenue. This was a landmark event and the whole marketing world realized the potential of 'Online Display Advertising'.

If we see today's display advertising - the banners ads, blog ads, rich media ads, content sponsorship, email newsletter sponsorships, pop ups etc. may sound like an ancient way to get noticed, but that is not all. Now online display advertising is becoming far more interesting due to 2 important trends -

One such trend is localization, in which companies do a better local ad targeting. Today more and more prospective clients are searching for local businesses online. They have realized that it makes more sense to target those in their geo-specific area, than to target on a broader spectrum of terms. Targeting local specific terms is only creating more targeted leads, for their business. Many companies, such as Facebook, LinkedIn and Local.com, have announced that they're getting into the local targeting game by offering geography-based advertising along with the standard demographic or keyword targeting the customers would expect.

Local targeting is already prevalent in search engine marketing lead by Google and it is good to know that display ads are heading in the same direction. The chart shows the exponential growth of 'US local online advertising spending' as the total such spending has almost become 4 times of what it used to be 5 years ago.

The only problem for such a localized business is the size and scope of the Internet. Today internet is been dominated by large multinational sites and these smaller localized businesses are first of all have very less presence and even if they there at all they often get buried up somewhere in the search engines. Therefore such a localized marketing probably needs a different approach all together for becoming effective.

The other noticeable trend to get excited about is the movement towards ad pricing based on cost per action (CPA) rather than cost per click (CPC). Paying for ads based on cost per action means that one does not pay the publisher until he/she gets the action desired from the ad. For example, if an advertiser wants its banner ad to drive someone to an online store to buy the advertised product, then the company won't have to pay until someone actually clicks the ad and completes the purchase. CPA is a means of controlling advertising spend. So, if the advertisers want to be sure that they are not indiscriminately spending money on terms that aren't driving business, CPA offers an opportunity to control the ROI. Now companies (such as Hydra, Commission Junction, Performics etc.) are not just blindly going to follow the eye balls, but they will follow the conversion as well. Jellyfish.com was the Internet's first comparison shopping search engine to operate exclusively on a Cost per Action (CPA) ad model and the same is being replicated by others.

It is going to be a Win-Win situation for both the customers and the advertisers. The customers will now be equipped with more relevant information about the products, offers, options available etc. than they used to have when the advertising was generic and not localized. On the other hand the advertisers can have better visibility and better communication with their customers. Also the companies focusing upon CPA rather than CPC can bring down their marketing costs (which might have been going in vain earlier as they were not very sure about the conversion rate). This cost reduction may be forwarded to the customers with price reductions.

World's Factory... Shutting Down???

People's Republic of China's annual average GDP growth for last decade (i.e. 2001 to 2010) was 10.5%, which was equivalent to the combined growth rate of all the G7 countries. The result of this express growth was that by the end of 2010, China's GDP was USD 6 trillion (next only to USA) and one fourth of this was accounted only by exports. China's exports value (as shown in the table) for 2010 reads USD 1.58 trillion, just about India's total GDP. From Apparels to toys, from electronics goods to furniture, you just name it... China produced almost everything at very competitive prices and Global retailers treated China as their one stop shop - the world's factory.

Everything was going well until recently when Chinese manufacturers started feeling the heat of inflation and rising fuel prices. The three main reasons why the world's factory was going all guns were - cheap manpower, low energy cost and low transportation costs. So this low cost production phenomenon was a majorly dependent on the low crude oil prices. But, the crude oil price has gone almost double of what it used to be 10 years back and so do the energy and transportation costs. Also because of soaring inflation, the costs of raw material are going up day by day. Additionally, inflation has also increased the cost of living in China, hence the workers demand more wages and gone are the days of getting cheap manpower. Basically, it will not be wrong to say here that the edge which Chinese manufacturers had over the other manufacturers is getting blunt sooner than later.

The wounds are getting visible now. Few days back Asda, the British arm of Wal-Mart, announced that it is buying some of its fabric from the UK this year. And this is not the only case, many other retailers have been heard moving from costal parts of China to the inland cities where wages are less (though they still have to bear the higher transportation costs) and others have announced to move out of China all together, to the lower cost locations such as Bangladesh, Pakistan, Indonesia, Philippines, Thailand, Vietnam etc. To encounter the high logistics and supply chain costs, the US retailers are also trying to move to the concept of 'Near-Source' Manufacturing. This trend is going to be beneficial for the locations like Brazil, Mexico, Argentina, Central America and Caribbean. Talking about the European retailers, they have one more reason to move to the 'Near-Source' Manufacturing and that is the current financial crisis in Europe. Many European countries are putting extra efforts to strengthen their Manufacturing units to generate revenues and counter the crisis. This means cheaper Denim from Turkey, Ceramics from Italy, Toys from Germany and plastic items from Hungary to name a few.

Though there can be some skepticism in sourcing products (and eventually relying) on already crisis hit Eurozone. Also a worrying fact may be that the European retailers who are paying the Chinese suppliers in US Dollars currently will have to shell out GBPs and EURs which are soaring closer to 1.5 USD and 1.3 USD respectively. But if we see the big picture - overall the Global prospects of this new 'Near-Source' Manufacturing model look good and it seems to be a concept that will prosper in coming future. This will not only diversify the retailers' Supply Chains by decentralizing the production but also will lessen the over dependency upon China. Plus, this surely will encounter the current problems of rising fuel rates and higher wages.

May be this far too early to demean and write off China's manufacturing prowess... May be China will not tank overnight. Yes, this process may take some time but its occurrence is inevitable. Soon we will start experiencing the decline in Chinese exports and over a period of time the 'World's Factory' will be shut down. Eventually the Dragon will fall and others will rise...