Will Online Ads Ever Click?

Most of the analysis that Song and his colleagues perform is more targeted, more down-to-earth. Each week, Song's team generates a fresh round of analysis for Avenue A's clients, which now number more than 100. Because it negotiates flexible contracts on behalf of its clients, Avenue A is able to dump whole classes of online ads that aren't working and to concentrate each client's marketing dollars on higher-performing ads. Using such an approach, Eddie Bauer was able to decrease its marketing cost per sale by 74% over three months. Likewise, Microsoft's Expedia travel site cut its cost per sale by 91% over eight months. "We counsel our clients that this medium is still pretty immature -- that we need to continue to look for efficiencies, as well as load up on placements that we know are effective," says Brian McAndrews, 42, president and CEO of Avenue A.

Beyond the Gut Check

Once the logic of Internet advertising moves from a leap of faith to ROI, a lot of interesting strategic adjustments can take place. Consider the example of Blue Nile, an online jewelry retailer that has so far managed to avoid the fate of most other e-tailing sites. Until last summer, Blue Nile had spent most of its advertising dollars on TV commercials and costly sponsorships that gave the site preferred placement on AOL and MSN. But Blue Nile's marketing director, Kevin Keith, 30, a refugee from Procter & Gamble, thought that the company could boost revenues quickly by running online ads with the help of Avenue A. Senior executives at Blue Nile were dubious of that strategy, but they agreed to try it. During the week in July when the online campaign began, traffic to the site jumped by 25%, and today the company garners $3 in revenue for every dollar that it spends on online advertising. "The old adage at P&G was that you plan, you do all this work, and then you pull the trigger on the campaign and just hope it does well," Keith says. "You have to watch for a month or so before you know anything, and if it's not doing well, it takes another 6 months to fix it. You're working in 6- or 12-month cycles. Here, the cycles are 2 weeks."

How did Keith generate such a boost in performance? A typical Blue Nile diamond buyer visits the site four times before making a purchase, so knowing which ads a customer has seen, and in what sequence he has seen them, is critical to figuring out what's driving sales. Sometimes a pattern jumps out from the data. Two recent ads sought to appeal to the same type of consumer -- a groom-to-be looking to save money on a wedding ring without looking like a cheapskate. The first banner asked, "Can a diamond be a sensible purchase?" The second one said, "Have more money for the honeymoon." People from Avenue A quickly noticed that the "honeymoon" ad was drawing far more customers. They alerted Blue Nile, which then asked its creative agency to come up with more online spots like that one.

Compared with the creative leaps made by the legends and luminaries of the ad world -- David Ogilvy, William Bernbach, Jay Chiat -- the performance-based approach of Avenue A lacks a certain poetry. It is, at bottom, a highly rational pursuit. But it delivers genuine results. "The core skill of the future is not 'Do I have a good gut sense of what works, a single important creative idea?' " says McAndrews. "It's 'Can I come up with 10 ideas and then test them to find out which one works?' Which means that a campaign is a living, breathing thing, and analysis becomes the central part of the marketing activity."

Waste Not, Want Not?

The challenge for marketers today is to recognize which kind of customer they are addressing at any one time and then to serve that customer the most appropriate message. On the Web, meeting that challenge is an immense task, requiring a system that can test and analyze billions of records, and then act on that analysis in real time (which, on the Web, means "in less than one second"). Such a system moves a company a big step closer to one-to-one marketing, yet it is built on a foundation of financial rigor that allows the company to determine the precise cost of acquiring each customer. In other words, it moves the ROI calculation down to the level of an individual customer.

Officially, Avenue A calls this new method "customer-life-cycle marketing." But Diane McCowin likes to call it "the Matrix," after the science-fiction movie in which much of the action takes place in the disembodied realm of cyberspace. McCowin, 32, vice president of analytics, comes to Avenue A from Bank of America, where she was senior vice president for strategic information management. Petite and intense, McCowin gets excited by customer modeling and data mining -- the analytic techniques that are at the core of the new approach -- and her enthusiasm is infectious. "This moves advertisers from 'Where are the sites that have the demographics that I'm looking for?' to 'Where are my customers, or where are the prospects who most closely resemble my customers?' " she says.