Here are the economics of ad spend from when I worked at Travelocity nearly a decade ago.
For an e-commerce business the goal is what's called conversion, which is when a user makes a product purchase. The margins on conversion vary by product and product segment. At that time most people came to travel sites to book airfare and the travel sites just basically resold what the carriers had on their own sites plus a $7 service fee charged by the carriers. Hotels were more lucrative averaging a margin closer to $50 per purchase. Travelocity had figured out some pricing algorithm that dominated the industry for packages where packages were flight plus hotel and optionally rental car. I can't remember the margin for Travelocity packages but I want to say it was around $300 per purchase.
The problem with conversion on e-commerce sites is time. The more expensive the product the more time the user will spend investigating a purchase. The more they will hop between various different competing web sites. Air purchases had a time realization of a few hours, hotels about a week, and packages were about 3 weeks. That means you do anything to induce increased conversion it will be 3 weeks before you should expect to see money in the bank, which complicates analysis of what went right and what went wrong. This means A/B testing becomes supremely important.
Ad spend was the opposite across the board. Ad spend would always bring tremendous traffic to the site but almost never would it increase conversion. However once you have eyes on pages you can generate revenue by other means such as affiliate programs and certainly with ads on your own site. The most amazing thing about ads whether they bring people to your site and cost you money or they are on your own site and generate you money is that the money spent/realized occurs in real time. Suddenly your analysis becomes stupid simple.
Ad traffic is dirty traffic though. Ads that cost you money rarely increased conversion and ads on your own site substantially detracted online traffic, by as much as 15% in a near term and much more gradually over a longer time horizon. The margins on ads is next to nothing so the more you invest in it the more you must invest in it to justify the both the spend and decreased traffic volume. This is what I would refer to as a drug addition. They had an immediate high, it was killing their business, and they only knew how to increase ad participation. Toxic.
For an e-commerce business the goal is what's called conversion, which is when a user makes a product purchase. The margins on conversion vary by product and product segment. At that time most people came to travel sites to book airfare and the travel sites just basically resold what the carriers had on their own sites plus a $7 service fee charged by the carriers. Hotels were more lucrative averaging a margin closer to $50 per purchase. Travelocity had figured out some pricing algorithm that dominated the industry for packages where packages were flight plus hotel and optionally rental car. I can't remember the margin for Travelocity packages but I want to say it was around $300 per purchase.
The problem with conversion on e-commerce sites is time. The more expensive the product the more time the user will spend investigating a purchase. The more they will hop between various different competing web sites. Air purchases had a time realization of a few hours, hotels about a week, and packages were about 3 weeks. That means you do anything to induce increased conversion it will be 3 weeks before you should expect to see money in the bank, which complicates analysis of what went right and what went wrong. This means A/B testing becomes supremely important.
Ad spend was the opposite across the board. Ad spend would always bring tremendous traffic to the site but almost never would it increase conversion. However once you have eyes on pages you can generate revenue by other means such as affiliate programs and certainly with ads on your own site. The most amazing thing about ads whether they bring people to your site and cost you money or they are on your own site and generate you money is that the money spent/realized occurs in real time. Suddenly your analysis becomes stupid simple.
Ad traffic is dirty traffic though. Ads that cost you money rarely increased conversion and ads on your own site substantially detracted online traffic, by as much as 15% in a near term and much more gradually over a longer time horizon. The margins on ads is next to nothing so the more you invest in it the more you must invest in it to justify the both the spend and decreased traffic volume. This is what I would refer to as a drug addition. They had an immediate high, it was killing their business, and they only knew how to increase ad participation. Toxic.