Online advertising can be much better at targeting certain demographics than its traditional media counterparts. But as more competition enters the space, these advantages do not automatically translate into greater profits, according to a new MIT Sloan study.
MIT Sloan Assistant Professor Alessandro Bonatti, says that marketers who think they can get better results at a lower cost by advertising on the internet instead of through more traditional media should consider all of the avenues available to them before making a decision. The same search and other technology that enabled advertisers to target particular audiences is also creating greater online competition for the same audience, thus reducing the profitability of advertising on any targeted website, he said.
The Paradox of Too Much Choice
"We know that newspapers have a very limited ability to target audiences," says Bonatti, who worked with Yale University economics professor Dirk Bergemann on his research into the issue. "Specialized magazines can do better, while Google has a very good ability to target who's browsing each page. So while online advertising certainly has the potential to drive out traditional advertising, it does not necessarily follow that online advertisers will make more money.
"That depends on the concentration of the online advertising industry," Bonatti added.
The bottom line? As technology keeps improving, more and websites will be able to sell narrow products to very specialized audiences, diluting the profits that can be made through specialized advertising. "Instead of competing for one large pool, one big market, you will have price war in each targeted segment as the slice gets more and more narrow."
"The paradoxical result," Bonatti concluded, "is that the better the technology, the lower the profits for advertisers. You can make a lot of money through super-powerful targeting if you are a monopolist, but not in a competitive market."
Bonatti's findings take on greater relevance as vertical and hyper vertical ad networks continue to proliferate. According to Adify's Vertical Gauge for Q309, brand advertising CPMs for various verticals - namely food, real estate and entertainment - are performing very well.