Will Online Ads Ever Click?

The problem with Internet advertising isn't that there's too much of it (or, these days, less and less of it), or even that most banner ads make 30-second TV spots look like Oscar material. No, the problem is that Internet advertising just isn't smart enough.

How long have marketing executives been listening to change-the-game rhetoric from business pundits, Net companies, and online-ad agencies? We all know the jargon: "one-to-one marketing," "mass customization," "permission marketing." And yet, even today, most companies don't really know what they are paying for when they buy an online ad.

A few years back, when online advertising first became a bona fide industry, it borrowed its pricing structure from the television and print-media industries. In those media, the cost of an ad is based on how many people see it -- that is, on the number of "impressions" that it makes. The digital world sets rates by measuring the number of people who either see an ad banner or actually click on an ad. But even so-called "click-throughs" have turned out to be a largely illusory way of assigning value. That's because the trail is broken once a clicker lands on an advertiser's Web site. Did an ad attract someone who actually purchased a product or signed up for a service? Or did that potential customer immediately disappear to another corner of the Web? It's difficult to answer those questions, and as a result, it's hard to justify outlays for online advertising.

Of course, the billions of dollars spent on TV, radio, print, and billboard advertising are subject to the same uncertainty. But digital marketing, by its very nature, should be more precise -- and hence more accountable -- than traditional marketing. Wasn't that its very promise?

The folks behind Avenue A, a 4-year-old company based in Seattle, aren't ready to give up on that promise -- even if they face an uphill fight in a hostile business environment. Back in 1997, when cofounders Scott Lipsky and Mike Galgon were forming the company (which now has more than 450 employees), they approached several big advertising agencies with a simple question: Why aren't your clients spending more money on the Web? The response was that advertisers had no idea what they were paying for, since they couldn't determine whether the ads resulted in actual sales. Lipsky, now 36, had worked previously at Amazon.com, where he built a data-mining system with the goal of zeroing in on the behavior and tastes of Amazon's customers. But here was a problem of even greater complexity: "We needed to figure out a system that could serve up ads and also track sales -- by following what people were doing once they clicked on the ad and landed on an advertiser's site," Lipsky explains.

Creating that system required writing new software and developing a new approach to following a browser tool through the intricacies of the Web. That innovation, developed first by Lipsky and later mimicked by several of Avenue A's competitors, makes clever use of the conventional way that ads are transmitted to a computer screen. When a user lands on Yahoo!'s main search page, for example, it triggers a signal from Yahoo! back to the browser to send an electronic request for the ads that occupy that piece of Web real estate. Each ad comes from a different computer server, and it flashes across the Internet to the browser, often in the form of a small, self-contained application that offers the same piece of animated eye candy over and over again.

Lipsky realized that the same sequence of electronic requests and deliveries could be used to track a browser after it clicks on an ad and gets linked to an advertiser's Web site. With the advertiser's permission, Avenue A places tiny ads, no larger than a single pixel, on key pages of the company's Web site -- for example, any page that contains an electronic shopping cart, or the Thank You page that a shopper sees when he or she completes a purchase. These so-called "action tags" are invisible to the shopper, but they trigger the same kind of request as a full-blown ad, and that request is in turn registered on Avenue A's server, leaving a trail of electronic crumbs that leads (ideally) to a purchase. (Throughout this process, the shopper remains anonymous; Avenue A's software tracks only the actions of the shopper's browser.)

In other words, for the first time, companies can track with precision the effectiveness of their advertising, and as a result, they can calculate the real return on their investment in digital marketing.

This approach entails number crunching on a grand scale. Young-Bean Song, director of analytics at Avenue A, recently ran several million Web transactions through a program to prove a rather intuitive point -- that the number of people who simply click on a company's ad has nothing to do with how many people actually buy or sign up for something on its Web site. "Eighty percent of companies still base their online-media buying decisions on click-throughs," says Song, 26, who is also director of the Avenue A Institute, the company's research arm. "But it's not about the click-through; it's about what happens afterward. That's the only way to get to ROI."