Here is an excerpt of his methodology:
A simple way to calculate how much money advertisers would spend on Twitter ads is to ask, how much profit will advertisers get back? We arrived at our own figure using the following analysis:
A. Assume each of Twitter's 2.3 million users sees 10 ads each day. Twitter could thus serve 23 million ad "impressions"—a banner ad appearing on a Web page—each day.
B. For Internet banner ads, the average click-through rate is 0.14%. So Twitter's 23 million banner ad impressions would generate, at a 0.14% response, 32,200 users who click on the ad.
C. Clicking on a banner ad takes a user to the advertiser's site. Only about 8% of consumers who visit such a site continue further, turning 32,200 clicks into 2,576 serious shoppers.
D. And of course, not every shopper at a Web site buys. If 30% of shoppers actually ended up buying the product or service sold, Twitter ads would generate 772 sales a day.
E. Finally, let's assume each sale generates $100 in profit. Thus, 772 sales would create $77,200 in profit each day for advertisers—or (times 365) about $28.2 million in profit per year.
Advertisers would find Twitter ads generate $28.2 million in profits. So the maximum they logically would spend on such ads is $28.2 million.
My issue isn't with his math. From my research he's pretty close with the click through rates. My issue is that he's committing the same mistake that most traditional media make when passing judgment on ads served on the internet. The mistake they make is holding net ads to an unrealistically high standard.Let's think about this closely - his analysis makes us believe that every single advertisement placed on a website should ultimately result in a sale. That's always the goal of advertising, but as any marketer who doesn't live in Candy Land knows, it's certainly not the real world reality. If TV, print or billboard ads were held to the same standard I'd bet that their numbers would look very similar to those on the net, if not worse. Let's face it, not everyone who watches a Lexus ad buys one. Some people don't need a car at that given time, some people can't afford a Lexus, some luxury buyers would rather have a Benz - the point is that advertising is mix of message, audience and timing.
Message
The first ads on the internet focused on catching attention - they blinked or moved and were often the only action on lifeless text-filled pages. Instead of carrying information within the ad that the user could recall at a later date, marketers focused on getting the user to click on the banner to get them to their website. After all - that's where the sale is made. The problem with this mentality is that if the user doesn't feel like leaving the site they are browsing, or like many people, is afraid of the spyware and other forms of computer AIDS they might catch from seizure inducing ads, the advertiser gets no value. They have provided no product information or compelling message to the consumer that he can utilize or recall when he IS ready to make a purchase. When people think running shoes they think Nike, when they think cola they think Coca Cola. They don't buy a Coke every time they see a TV ad or a billboard with the company's ads, but the constant messaging over years makes these brands top of mind at the point and time of purchase.
Most internet advertisers are missing a bigger point - part of advertising is establishing your brand and messaging so that the consumer can use it later, not trying to get them to make impulse purchases. This is a tough pill for the bean counters to swallow because the numbers don't work out quite so elegantly as in the example above, but it's sadly a more accurate picture of how advertising works. After all, the human mind isn't elegant and it certainly isn't simple.
Audience
Google is generally lauded for its text ad system. After all, it brought internet advertising within reach for millions of small businesses - especially local ones. Sadly, most people forget to give Facebook credit for the inroads they are slowly making in the hyper-local advertising space. I thought it was brilliant when FB began toying with user-posted geo-targeted ads. I'm seeing more and more local companies, bars, promotions and events being advertised on Facebook and I'm actually finding myself clicking on them - that's right, I'm clicking on banner ads. But why?? Because they're RELEVANT to me. I didn't know Oasis was coming to my city until I saw the ad for the concert on Facebook. I didn't buy a ticket right away from the site, but I'm certainly planning on it in the near future. The model above would call this a failure for the advertiser, I call it an unqualified success. The right message got to exactly the right person (I have rock listed in my favorite music) in the right place. Most ads on the net however, even on Google text ads, are becoming a sea of scams, get rich quick schemes and other assorted trash. Most of the ads just aren't relevant and don't carry a message I can remember for later. If Twitter implemented a similar hyper-local ad service I think the resistance from users would be minimal - ads can be a real asset when they're relevant. The challenge is to resist the urge to make a quick buck by plastering your site with spazzy banner ads telling me I'm a winner.
Timing
This aspect is the toughest part of advertising and it definitely hurts the most. It hurts because if you do a great job creating a compelling message and you actually target your ad to the right person they still might not buy. But why? My ad was genius and this person is in the exact demographic and region for my products... The sad fact is that not everyone needs a particular product at a specific time. Seeing a great car ad for a vehicle that would perfectly suit you doesn't mean you're going to sell your 5 month old BMW for a Lexus. Again, the model above calls this a failure. I don't think it's so simple. That person will need a new car eventually, and if Lexus does a good job with the message and the audience aspect of their marketing push, when the timing is right the consumer will put that message into action.
I'm not saying that one of the goals of net advertising should not be to create immediate purchases - it very well should. But this goal should be more of a benefit or perk than the modus operandi. After all, people can't buy shoes through their TV (yet), or rip a bottle of Jack Daniels from the pages of GQ magazine. Internet ads can have the dual benefit of exposure and direct results - few if any other ad media can claim both.
I suggest that advertisers need to learn more about combining the three aspects of advertising and doing a better job on the message and audience so that when the time is right consumers make the only choice they should.
Let's all be a little more forgiving of the new kid on the block - he might not put every other ad media out of business, but he's definitely got some cards left up his sleeve.
