apt ViewpointInternet Advertising:

How Online Ads Can Affect Offline Sales

Scott SetrakianManaging Director

Jonathan MarekSenior Vice President

Author:

San Francisco Washington, D.C. Londonwww.predictivetechnologies.com

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Abstract A mother wants to buy a backpack for her child who is starting first grade. She logs onto an Internet search engine (such as Yahoo or Google), and runs a search on the words “child’s backpack.” The search engine finds several hundred thousand different web pages that contain those words.

When the search results are presented, links to several websites are displayed prominently at the top of the page and along the right hand side. These links lead to relevant websites that paid the search engine for the right to appear prominently in front of anyone who searched for certain key words – they are advertising “sponsors.” The mom clicks through on one of the sponsor websites, finds a backpack that suits her needs, and buys it online.

This is the heart of Internet advertising. “Search” and its cousin, “Banner” (display ads posted on targeted websites, such as an ad for backpacks on a website about child raising), represent about 7% of all ad spend today. Search and Banner are widely believed to be rapidly stealing share from more traditional advertising media.

Internet advertising is especially attractive to advertisers because the economic proposition is clear for online sales. Click-throughs are automatically recorded for each ad, and resulting sales are directly captured. Calculating ROI becomes a straightforward task, comparing the

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cost of the ads to the profits from the online sales that result.

Internet advertisers who do business in both the online and traditional brick-and-mortar store channels have recently started to ask a new set of questions: Do Search and Banner ads also increase sales in the physical store network? Do customers buy more at a brick-and-mortar store after seeing Internet advertising? For example, might the backpack-seeking mother visit a store that she saw advertised online, having learned that the retailer had good candidates, to examine the backpack options herself and decide in person which one to buy? Might she seek out a well-reviewed brand at a local store, so that she doesn’t have to wait for delivery and can have it in time for the first day of school?

The implications of these questions are important. If Internet advertising creates even more value than the margins driven by incremental online sales, it then represents a more attractive advertising medium than previously thought, and for a larger pool of potential advertisers.

To better understand the offline impact of online advertising, Applied Predictive Technologies (APT) is collaborating with selected leading retailers, banks, and consumer goods companies on an “online to offline” Test & LearnTM initiative.

Measuring the Offline Impact of Online Ads In a typical test, APT partners with a company to design and launch an online campaign to a subset of web users in carefully selected test markets, while leaving other control markets “dark.” APT’s Test & Learn Management System then tracks the differences in store sales between the test and control markets, and performs sophisticated analyses to identify the impact that the online advertising has on sales in the store network overall.

APT also identifies differences in performance that are correlated with different store and market characteristics, and different ad elements. The profit generated by the online advertising is compared to its cost, creating a true read of the ROI of online advertising offline sales.

The initial results are compelling:

n Online advertising drives in-store revenue lift in all instances analyzed to date. For a retailer or consumer goods company that sells in both online and offline channels, the value of Internet advertising is likely greater than the value of online lift alone;

n The degree of in-store lift varies from case to case. In some examples, the in-store lift drives attractive returns to the Internet

“Stores in test markets with Search ads had a statistically significant lift in sales overall, a result that produced attractive returns to the advertising campaign. Sales of both the advertised product, as well as other, more “impulse buy” items, increased significantly.”

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advertising expense all by itself, without any profits created by new online sales. This means that the Internet can be a profitable advertising channel for retailers and consumer goods companies that sell predominantly through brick-and-mortar networks, regardless of the extent of their online presence;

n Advertising ROI often varies market by market, leading to opportunities to maximize Internet advertising returns through intelligent targeting;

n Internet advertising ROI varied on the basis of products advertised. These differences are unique to each advertiser’s concept and merchandise mix;

n Search and Display advertising behave differently, and have different returns;

n With the results of carefully designed tests, advertisers can exploit opportunities to maximize their Search and Display ROI based on tailoring the message, intensity and ad type.

Case Study APT worked with a US-based specialty retailer to analyze the impact of Search advertising on in-store sales. A Search campaign was implemented in selected markets, and the change in performance of the stores in those test markets was compared to the change in performance of stores in control markets, where no Search advertising campaign was implemented. The Search campaign was focused on key words relating to a specific product line. The retailer was interested in understanding what would happen to sales in its stores overall, to sales of the advertised product set, and to other product categories.

This may sound like a simple analytical task. However, measuring small changes in sales at a store is much more complex than measuring changes in click-thrus on a web page. The complication is rooted in the nature of store sales.

Fig. 1: Daily sales at a representative retail store:

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Daily sales vary by over 100% in any given week and by well over 400% seasonally. However, a change of only 1.5% in daily store sales can drive terrific returns to Internet advertising. Accurately detecting a 1.5% change in sales in an environment where sales change radically on a daily basis, regardless of the Internet advertising, requires highly specialized protocols of test design, control group selection, and analysis of results. This is known as the “signal-to-noise” challenge.

APT’s Test & Learn process (Figure 2), brings highly specialized techniques to bear on the problem of reducing noise and finding the true attributable impact – the “signal” – of the activity under examination.

In the case of this specific test, the signal-to-noise challenge was exacerbated by Hurricane Ike, which brought significant winds and rainfall to the middle of the country during the course of the test, impacting sales at many test and control stores.

APT applied sophisticated analytical approaches to mitigate not just daily variations in sales but also the impact of the weather anomaly, in order to maximize accurate signal detection.

The results of the test were important for this retailer. Stores in test markets with Search ads had a statistically significant lift in sales overall, a result that produced attractive returns to the advertising campaign. Sales of both the advertised product, as well as other, more “impulse buy” items, increased significantly. Fig. 2: APT’s Test & Learn Process

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Ongoing Work APT is working with a number of retailers to understand the impact of online advertising on offline sales. Additional research addresses such questions as:

n Can online advertising replace or enhance weekly newspaper inserts (also known as Free Standing Inserts (FSI), Weekly Supplements, etc.)? How does Internet advertising ROI compare to FSI ROI - overall, by market, and by week?

To address this issue, APT is working with large retailers who use FSI to investigate the relative effectiveness of Internet advertising under a variety of combinations of FSI / Internet use;

n How does Internet advertising fit into the larger framework of ad media alternatives, including TV, radio and print?

To address this issue, APT has collaborated with several retail and consumer goods companies to design and execute experiments that evaluate Internet advertising as one component of a strategy that incorporates traditional advertising media, in order to determine which combination is most effective. Results to date show that Internet advertising plays a meaningful role in an optimal media plan, when results include lift accomplished at the store level.

The return profile improved dramatically with detailed evaluation of differential performance by store. APT identified certain market attributes that were associated with proportionately greater sales lifts than the overall average, including trade area per capita income (Figure 3).

In other words, stores in trade areas with average per capita income greater than $33,000 saw sales increase 4% when Internet advertising was underway. The Test & Learn approach provided the retailer with a means of targeting its ongoing search campaigns, investing only in those markets that would perform best. As a result, the retailer was able to scale back advertising costs in low impact markets, while maintaining a large majority of the lift, and thus significantly improving ROI.

Continuing Test & Learn evaluation can continue to build on these findings and drive a refined, highly profitable Internet advertising program.

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Concluding Thoughts The emergence and continuing growth of online advertising media offers consumer-facing advertisers the opportunity to improve sales and margins cost-effectively. The online channel drives sales and profits not just for online stores, but for brick-and-mortar locations as well.

Through intelligent testing, marketers can understand the ROI of online advertising across all sales channels. Expertly done, testing can also help target online advertising to the best alternative (e.g., search vs. banner), the best products, and the best frequency, to maximize the effectiveness of ad spend.

For insight into how Internet advertising can drive sales for your company, or to learn more about this groundbreaking research, please contact APT at 703-875-7700 or info@predictivetechnologies.com.

About Applied Predictive Technologies

Applied Predictive Technologies (APT) is the industry leader in helping large-scale consumer-focused companies institutionalize a world-class Test & LearnTM capability. Through the combination of APT’s proprietary software and capability-building consulting support, APT has helped some of the world’s largest and most successful companies achieve significant bottom-line improvement.

Scott Setrakian,Managing Director

Mr. Scott Setrakian is Managing Director and co-founder of Applied Predictive Technologies (“APT”). Mr. Setrakian has over 20 years experience advising many of the world’s largest and most successful companies. His work focuses on the development and implementation of strategies and processes that lead to significant improvements in profitability and corporate value. He has led the work of hundreds of management consultants in engagements in over 20 countries on six continents.

Prior to co-founding APT, Mr. Setrakian sat on the Board of Directors of Oliver Wyman (formerly Mercer Management Consulting), one of the world’s largest general management consulting firms. He led the firm’s consulting activities in the Energy and Process Industries around the world.

He currently sits on the Boards of Directors of APT, The Buena Vista Funds, University Games, the San Francisco Zoo and the Saroyan Foundation.

Mr. Setrakian holds a MBA from the Stanford Graduate School of Business. He received an AB in Human Biology from Stanford University, where he also completed the requirements for a degree in Psychology.

Jonathan Marek,Senior Vice President

Jonathan Marek, a Senior Vice President with Applied Predictive Technologies (APT), leads engagements with casual dining, quick service restaurant, specialty retail, big box retail, and banking clients. He has helped clients improve performance through better capital strategy, new concept development, media optimization, store labor planning, site selection, and store-based goal setting.

Mr. Marek has ten years of experience applying quantitative techniques to critical business issues. Prior to joining APT, he was a Principal at Oliver Wyman (formerly Mercer Management Consulting), where he advised multi-unit retailers on new business strategy, network planning, and operational process issues. At Mercer, he drove several field-based change efforts with Fortune 500 companies. He has led engagements across North America, Latin America, and Europe.

Mr. Marek holds a B.S. in mathematics (with Honors and Distinction) and an A.B. in philosophy from Stanford University, where he graduated Phi Beta Kappa.

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