In June, Luke Mitchell's student marketing service, Reach Students, ran a series of Web ads to promote an offer from a major parcel delivery service. The timing seemed perfect: just when college students decide whether to store belongings for the summer or ship them home. So did the placement--on the Facebook social network, where students hang out for hours. Yet when the results rolled in, Mitchell was stunned: Only 0.04% of those people who got the ads on their screens bothered to click on them. He had expected at least 1% to respond. "We had just a handful of users come to the site," he says.
The truth about online ads is that precious few people actually click on them. And the percentage of people who respond to common "banner ads," the ubiquitous interactive posters that run in fixed places on sites, is shrinking steadily. The so-called click-through rate for those ads on major Web destinations such as Yahoo! (YHOO ), Microsoft (MSFT ), and AOL (TWX ) declined from 0.75% to 0.27% during 2006, according to Eyeblaster, a New York-based online ad serving and monitoring firm. It says that last March the average click rate on standard banner ads across the whole Web was 0.2%. This reflects a surge in new ads and Web pages, fueled by the rise in social networks.
Click-through rates have been declining for years. The novelty of Web ads that helped fuel higher responses in the beginning has worn off as online marketing hit the mainstream. That explains much of the froth around Internet acquisitions these days. Google (GOOG ), Microsoft, and others are spending billions to buy advertising networks and develop systems that enhance their ability to deliver ads to the people who are most likely to respond.
The latest phase in such ad targeting will begin on Nov. 6, when Facebook is expected to explain how it will help pinpoint users who are most likely to be interested in what marketers are selling. Facebook has revealed little of its plans. But Erik Qualman, head of marketing for Travelzoo (TZOO ), an online travel outfit that sponsors a travel group on Facebook, thinks the site will allow targeting based on demographic profiles and interests that users reveal about themselves.
If a user says on his Facebook profile he is interested in football and attends Harvard Business School, he might get ads for New England Patriots tickets. "Social networks have great insights into their users," says Mike Walrath, CEO of Right Media, an ad outfit bought by Yahoo that works with social sites. "The more targeting options that are available to a social network, the more likely they are to be able to get better prices."
To some extent, declining click rates reflect how Web users are getting numb to the least sophisticated Web come-ons. That's bad news for advertisers, who increasingly pay based on the number of banner ads served up, not the clicks they draw. Response is especially low on sites with Web-savvier audiences, such as social networking sites.
Of course, not everyone is happy with the move toward targeted ads. On Nov. 1, the Federal Trade Commission was to begin hearings related to consumer privacy and online advertising. Consumer advocacy groups hope the FTC will restrict the amount of data companies such as Google and Yahoo can collect and use to make ads more relevant. Web advertisers say they are adopting ways to protect users' data.
But as responsiveness declines, ad targeting grows more attractive. Marketers see increases of 30% to 300% in click rates when ads are customized based on criteria such as the location, content of Web pages visited, or information researched on search engines. Kevin Lee, co-founder of search marketing firm Didit, says: "Targeting will come in to rescue all forms of digital advertising."
By Catherine Holahan, with Robert D. Hof in San Mateo, Calif.