Costs are rising and effectiveness is falling. What on earth is happening to the digital marketing industry, and how can advertisers navigate these choppy conditions?

There are two key trends digital advertisers are grappling with in both the US and Europe. They’re paying more to get the same visibility (costs rising), and the inventory platforms are offering is getting diluted (effectiveness falling).

Trying to understand what’s going on is hard, as the market for digital ads is split between global giants who put auctions and prices within black box mechanisms.

Kinase benchmarks

We pulled a like for like analysis of the retail peak period: Nov 23 to Jan 24.

Across Kinase clients, we saw a 15% rise in CPCs year on year.

Meanwhile, average impressions and clicks fell slightly, depending on vertical. This corroborates other industry reports and available data

Industry trends

The US agency Tinuiti put together a 2023 report across platforms, showing that US ad pricing increases per platform are diverging. Amazon prices for sponsored products rose steeply in 2023, but Google search CPCs rose across the year, reaching 9% in Q4.

The complicating factor is that the effectiveness of digital ads is also in flux - automated campaign types, changing AI driven goals and black box delivery methods mask falls in ROI.

The mood among advertisers is summed up by John Edgarm chief exec of Fenwick, in the FT: “Online is a much more expensive place to trade than it’s ever been. That’s the Google costs, the logistic costs, and those costs vary with sales.”

What mechanisms are causing this?

At first it appears as a tangle of market demand, user behaviour, platform changes, and increased competition. It’s definitely a multi-factor, changing dynamic, but we’re not dealing with the fall of the Roman empire here: we can pinpoint some specific mechanisms which play into each other. In doing so, clear priorities for action emerge.

One

Market demand - it’s clear that after the Covid boom for ecommerce, high inflation hit and consumer confidence has been lower. In the UK this has been compounded by high housing costs. Demand in many verticals is therefore flatlining, or dropping year on year - fewer searches, lower CTR, lower AOVs result.

The crucial element to add to this is: If more advertisers were competing for the same or fewer clicks or impressions, costs might rise. But the platforms might see their profits flat lining. In order to preserve profit growth for Meta and Google, further dynamics come into play.

Two

As we discussed in our article on Google antitrust cases, legislators and regulators have been prising out the various mechanisms and levers which tech platforms use to ultimately control pricing and preserve profits. The behaviour of near-monopolies is also under more scrutiny - and awareness - than ever before.

Although interesting and useful for empirical analysis of what we see in auctions and ad trends, these dynamics really lead us to a more crucial point for understanding inflating costs.

Three

If growth doesn’t come from more people searching and CTRs rising, then platforms flex other methods at their disposal to ensure their own revenue growth, at the expense of advertisers.

Because of how these platforms sell their ads in a self-service competitive environment, price rises disseminate out in new campaign types and changes to targeting effectiveness, as much as they do in rising auction thresholds and CPM top lines.

Dilution is the platform’s solution

Advertisers need to reach their audience - and platforms make it more costly to do so.

Automated campaign types have been the biggest lever in 2023 for this trend. Performance Max as a share of advertisers spend in Google Ads (excluding Shopping), rose sharply in 2023 from 10% to 16%. The ways in which it loosens control on spend are clear: it opts you and your competitors into the same auctions but hides the keyword information of what you’re bidding on - e.g. both bidding on each other’s brands by default.

You may see lower CPC traffic, but you have to buy more of it to get the results you want.

Essentially, the tactic is to counteract headline CPC inflation by diluting ad serving with ineffective but low CPC traffic, while withholding the actual information of what surfaces your spend is going on.

Think of it like this - you start with a dish you love at a restaurant. But then the restaurant starts swapping out ingredients for cheaper ones - the meal is still great, but there’s something wrong. The restaurant tries to maintain the balance - how cheap can they make the dish before their customers start boycotting it?

To illustrate this dynamic in a typical Google ads account, here’s a realistic example:

For this advertiser, while CPCs on their more directly targeted, high value keywords have risen by 40% over the time period shown, CPC costs on the lower value, high volume placements through Performance Max have risen by 27%. The diluted result shows as a 13% increase in CPC, while the broad placements may well weaken performance overall.

Platform cycles

The trends we’re seeing are not inevitable, nor are they inexorable. Changes to competition, regulation, user behaviour and underlying economics will push digital platforms in new directions.

A broader perspective is given by the tech critic Corey Doctorow in an article in the FT on his concept of platform ‘enshitification’.

Doctorow’s thesis is simple, and useful for understanding how we have got to where we are. It has three stages:

First, platforms are good to their users. They provide a great service - Facebook allows people to interact with friends; Google provides a reliable way of finding what you want on the internet.

Secondly, these platforms start to leverage their user base to make things better for their business customers. They sell cheap ad inventory and make sure targeted users see it, or connect your ad to people searching directly for your products. In doing so, they undercut existing ad platforms (like TV) in price, while also demonstrating their new startling effectiveness.

In the third and current phase, the platforms now leverage their business customers to claw back all the value for themselves. They walk a balance between making the experience on their sites just good enough to keep their user base, while making their ad inventory just effective enough to keep their advertiser base.

What can advertisers do about it

Place your budget where you get the best ROI - this media mix will change over time. That’s why Kinase takes a holistic and objective first view of marketing.

Robustly test and use exclusions where possible - crucial with Performance Max.

Have a testing plan, and test to destruction. Although it may seem like a rigged black box system, there’s still room to optimise (for example, to minimise algorithm ‘learning periods’.

Make sure you’re optimising to the right KPI to maximise the available effectiveness.

Make demands of platforms. Google responded to demands for brand exclusions on Performance Max, for example, and X (formerly Twitter) has suffered from advertiser’s voting with their feet.