Online advertising dollars allocated in company budgets are today the largest that have ever been reported. In Q1 of 2004, $ 2.3 billion was spent on online advertising. That was a 40 percent increase over the previous year, and it was the largest amount spent on record. The analysts who reported these results started tracking the expansion in 1996. It's safe to say that it was the biggest quarter for online advertising in history.
There are a few trends worth noting that are driving technology innovation. The first is the important role of marketplaces like Amazon.com in brand development and merchandising. Although growing top line revenue is an important driver in a merchant relationship, it's only part of the story. Merchants benefit when customers associate their positive shopping experience with the sellers' brands, elevating the third-party retailer in the eyes of the consumer.
Second, we see a trend toward SKU-level or item-specific merchandising. Your brand image is critical, but if you're not thinking about merchandising in terms of the most detailed product attributes and variables—pricing, title, description, keywords—you're not fully leveraging available merchandising control.
An expansion is definitely occurring in the way that brands and products are reaching consumers, not just in the number of channels, but in the number of value-added intermediaries involved in each promotion or transaction. Retailers, catalogers, and direct marketers are connecting with customers where they shop and buy through partner-enabled channels combining services from merchandisers such as Amazon.com, advertising portals, and affiliate networks. I call these channels Distributed Merchandising Networks.
Also, online shoppers are becoming savvier at evaluating competing product offerings and merchants on the web. Whether they purchase online or offline, shoppers increasingly base their perceptions of a retailer's selection, service level, and brand image on the online experience. The depth and quality of information that retailers provide through online marketplaces and shopping portals exceeds that of other promotional tools such as search engine marketing. So, we see these channels as critical for establishing credibility with consumers.
As buyers become more informed, with more options for where and how to buy, merchants have to understand how and where they engender or lose customer trust. You can drive traffic to your online store all day, but if it's hard for customers to find the right product, if items are out of stock, if returns are difficult, you're wasting your budget. Retailers that expect a high ROI on their merchandising dollars have typically established and are meeting a published service level defining their fulfillment terms, customer service level, and so on. You can't fight bad service and a bad reputation with more ad spending for long.
Once you've addressed the service level issue, then it becomes a question of creativity in reaching your customers, both in the sense of getting your message in front of them, and then in establishing that emotional connection. That can be hard to do in a comparison shopping environment where more and more sellers are meeting more and more customers on what you might call "neutral ground." Again, it gets back to offering the most complete and timely information about your products, and at the same time, communicating your unique value proposition, whether it's price, service, or domain expertise through the merchandising medium. Knowing what sets you apart from your competitors (ideally a combination of all of these benefits) makes it easier to create consistent messaging across channels.
There's a timing element to this as well. To be competitive, you have to present the most current information in terms of inventory and pricing to your customer, whether they are on your own e-commerce site or within a remote channel. With the advent of more structured tools based on XML web services, it's possible to greatly improve the timeliness of data presented to customers through third-party channels.
Distributed merchandising networks imply a growing "distance" between the customer point of sale and the seller, and an increase in the number of intermediaries involved in merchandising and selling. The ability to manage these intermediaries becomes a key driver of sales performance, brand stewardship and customer experience. Retailers, catalogers, and direct marketers should approach these distributed partner relationships with the same level of intelligence and discipline that they have applied to their direct sales operation.