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Jul 26, 2008

Are Ad Spend And Commerce Spend Correlated?

Ed: Fred asks if online ad spending translates into online commerce dollars. He also recognize the value of advertising for brand building. Very good questions.

It also raise the issue of single variate analysis. Too often, journalists, investors, and analysts simplify cause and effect to a single catchy phrase.
  • The problem is this. The solution is this.
In true economic systems, problems are rarely single variate and one-dimensional.
  • Many variables explain an outcome. Ad spending impacts commerce. So do many other factors - more than the catchy Product, Price, Place, Promotion conventional wisdom; big becomes bigger conclusion; or the location, location, location wisdom of retailing.
  • A system converges to new equilibriums. Supply and demand curves adjust to change that cannot be explained by a single relationship. This convergence can occur quickly or take years, like the adjustment to new oil price levels.
  • Relations are significant only when the noise level is random and controlled.
Are we concluding based on noise? With the increasing volume of content from amateurs and professionals on the Internet, should we be asking the basis for our conclusions and recommendations?

Are Ad Spend And Commerce Spend Correlated?

I wrote a post with some numbers on global internet use earlier this week and followed up with a second post the next day. Both posts generated excellent comments and also some good links with additional numbers.

I particularly like this post from the InPage Advertising blog which has some good IAB numbers on Europe. This chart from that post caught my eye.


So the online ad spend in Norway is 130 euros per monthly unique Internet user in Norway. And that number in Italy is 37 euros.

So that go me thinking. Is the online commerce market (on a per user basis) four times larger in Norway than it is in Italy? Is the online commerce market per user in the UK three times larger than France?

I don't think so, but I don't have the data to back that up.

If all internet advertising was direct response/CPC/CPA advertising, then I think the correlation would be pretty high between ad spend and commerce spend. But it seems that brand oriented campaigns are more prevalent in some countries like UK and the some of the nordics and less prevalent in markets like France, Austria, and Italy.

I'm not sure why that is. It could be that branding dollars have just not moved online as quickly in some markets as others. This chart from the same post bears that theory out.


But I still wonder if online ad spend will ultimately be correlated with online commerce spend. There are many markets around the world where online commerce is starting to take off but online advertising has not. Are those developing markets big opportunities for online media?

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