accounting for advertising expenditure

Advertisers understand that brand impressions influence online actions.  Having previously seen good advertising for a brand helps to induce a user to click on an ad for that brand.  Microsoft, which is far behind Google in search advertising, is vigorously embracing and extending digital advertising to emphasize display advertising.[1] Google’s acquisition of DoubleClick indicates that Google also recognizes the importance of serving and reporting impressions of display ads that users do not click.

The effects of competition across display advertising and pay-per-click advertising depends significantly on forces for accountability in advertising expenditure.  Microsoft’s Atlas Institute is vigorously advocating a re-allocation of “credit” for clicks on ads:

The current “last ad” model attributes 100% of the credit for a conversion to the last ad seen or clicked.  This is the current standard the industry has relied on to justify their digital media spend.  The problem with this approach is that it ignores the contributions of any previous ads that led the customer down the road to the conversion.[2]

The Atlas Institute proposes a “new measurement standard” that it calls “Engagement Mapping”:

Engagement Mapping counts every customer touch point (not just the last) and enables advertisers to be more effective, more creative, and more relevant with their digital marketing [expenditure] … Flexibility in the way you measure each factor lies at the heart of the new model. … The new model gives advertisers the ability to make specific adjustments and set the dials to reflect the impact of the factors they believe have the greatest impact on their Engagement ROI.[3]

Technical tools that allow persons to adjust their view of reality to reflect their particular beliefs have deep, well-established demand. Such tools are particularly valuable for large advertisers that are institutionally and personally invested in long-established advertising programs and patterns.  Flexibility in accounting for advertising effects is also important for managers seeking to use corporate barter to obscure losses on less flexibly valued assets.

Considering other factors relevant to user response highlights the meaninglessness of managerial allocation of credit for ad clicks.  An attractive, well designed product helps to induce users to click on ads.  Should the contribution of product design be ignored in allocating credit for last-ad clicks?  Should the contribution of product reliability be ignored in allocating credit for last-ad clicks? What about product feature set?  Why should Engagement Mapping just allocate credit to advertising expenditure?  In practice, allocating credit is mainly valuable as a tool for personal and bureaucratic justification.

Economically sensible, quantitative analysis of ad conversions should associate marginal changes in different types of advertising with 100% of the change in ad conversions.  That means estimating partial derivatives of conversions as a function of variables in the conversion funnel — ad impression order, ad frequency, ad size, ad media type, etc.  Optimization requires equal conversion effects across equal dollar-measured marginal changes in different advertising variables.

Google and Microsoft might compete to provide tools for managerially allocating credit for advertising expenditure.  Alternatively, they might compete to provide tools for (locally) optimizing advertising expenditure. Neither type of tool can substitute for a good product, a good business plan, and employees focused on achieving external results.  But in the long run, employees, businesses, and the economy will be much better off with the latter type of competition than the former.

Update: I’m honored to have had this post shortlisted for post of the month over at the fine blog, Only Dead Fish.  Head over there and vote for … the best post.

Notes:

[1] Microsoft’s award-winning CEO Steve Ballmer recently stated:

To succeed, he said, the company will have to find a way to fundamentally change the experience and the economics of search. “You have to redefine the category,” Ballmer said. “We’ve taken some steps in that direction.”

[2] Atlas Institute (2008), Engagement Mapping: A new measurement standard is emerging for advertisers, Thought Paper, p. 2.

[3] Id. pp. 1, 11, 12.

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