A Startling Anecdote About Online Ad Spending From Restoration Hardware

Category 1 storm clouds are gathering over what has traditionally been one of the most lucrative, and perhaps only profitable, sectors to come out of Silicon Valley in decades: online advertising.

Two months ago, it was P&G which fired the first shot across the "adtech" bow when not long after it announced it was slashing its digital ad spending because it thought it was not getting the kind of return on investment it desired, it made a striking discovery: “We didn’t see a reduction in the growth rate.” CFO Jon Moeller said “What that tells me is that that spending that we cut was largely ineffective.”

Speaking to the WSJ, P&G CEO David Taylor echoed Moeller when he explained that cuts on digital ads are part of a larger strategy to more quickly halt spending on things – from ad campaigns to product development programs - that aren't working: “we got some data that said either it was in a bad place or it was not effective,” Taylor said of the digital cuts. “And we shut it down and said, ‘We’re not going to follow a formula of how much you spend or share of voice. We want every dollar to add value for the consumer or add value for our stakeholders.”

Previously P&G's CFO had said that “the reduction in marketing that occurred was almost all in the digital space. And what it reflected was a choice to cut spending from a digital standpoint where it was ineffective: where either we were serving bots as opposed to human beings, or where the placement of ads was not facilitating the equity of our brands."

Moeller also touched on the two most common complaints about digital advertising scams: advertisers are paying for ads that are viewed and clicked on by bots, not humans; and ads are placed by thousands of automated “ad exchanges” that are out of control of the advertiser on sites and pages that don’t match the advertiser’s products.

Commenting on this, in late July, Wolf Richter summarized the state of affairs as follows:

Marketing executives of other companies too have long riled against the murkiness of digital advertising, the false promises, the intractability of the Internet, the clicks and views by bots on which advertisers are wasting their money, and the billions of dollars that get blown without results. But getting a grip on what works and what doesn’t is hard.

 

There’s a larger issue: Retail spending (not adjusted for inflation) has grown on average 2.4% per year in the US over the past five years. Over the same period, digital advertising nearly doubled to $72.5 billion in 2016. Clearly, even digital advertising – despite the lure of Facebook and the like – cannot induce consumers overall to spend more and increase the size of the overall pie for advertisers. It can only, at best, divide up the pie differently.

 

And when one of the most sophisticated high-tech advertisers in the world decides it is overspending on digital advertising and is able to very carefully remove the rot, thus bringing down its cost without hurting its revenues, other companies will follow, with some consequences for the relentless but often ineffective surge of digital advertising dollars.

Of course, the implications to this admission that online advertising was either being gamed by bots, or generally underperforming were significant, as it jeopardized the future revenue streams of two of the biggest companies in the world, Alphabet (aka Google) and Facebook, both almost entirely reliant on online advertising. How long before other anchor names decided to similarly cut back on their online ad spending?  In short: slowly but surely, chronic buyers online advertising space, are slowly waking up to the fact that "adtech" may be one of the biggest hype (and hope) bubbles in history. Not all of it, but a material, substantial portion: one that may be responsible for a significant chunk of Google's or Facebook's cash flow and market cap.

A separate, if just as concerning problem emerged last month, when the WSJ reported that online ad giant, Google, would issue refunds to advertisers for ads bought through its platform that ran on sites with fake traffic, and generated no actionable advertising "clicks." Just how much of Google's ad revenue (and thus profits and market cap) had been inflated over the years by said "fake ads"?

* * *

So fast forward to last week, when during Thursday's Global Retailing Conference organized by Goldman Sachs, Restoration Hardware delightfully colorful CEO, Gary Friedman, divulged the following striking anecdote about the company's online marketing strategy, and the state of online ad spending in general (courtesy of @parsimony16). What Friedman revealed - in brief - was the following: "we've found out that 98% of our business was coming from 22 words. So, wait, we're buying 3,200 words and 98% of the business is coming from 22 words. What are the 22 words? And they said, well, it's the word Restoration Hardware and the 21 ways to spell it wrong, okay?"

Stated simply, the vast, vast majority of online ad spending is wasted, chasing clicks that simply are not there.

Here is the full must read excerpt from the conference (full link here):

I'll share a little anecdote with you on this point.

 

We had our marketing meeting in the company several years ago and the online marketing team was pitching to double their budget, right, and at the time, say, look, nobody in the company is doubling their budget. But tell me why you believe that's the right thing to do. And they said, well, look, our customer acquisition cost and our ad cost is the lowest in the company. And I said, well, tell me about the data, show me how. And they said, well, people who click through the words that we buy on Google, the ad cost was lowest. And I said, how do you know that they're clicking on the word and going to the website because of the word you bought versus they saw a store or they received a source book? They said, oh, we know.

 

I said, well, how many words do you buy? They said 3,200. 3,200 words. I said, well, what are the top words? How are they ranked, the ranking of the words? Oh, we don't have that, right. And I was getting the look at like, oh, Gary is kind of one these old brick-and-mortar guys. He just doesn't get it.

 

And I said, well, what are the top 10 words? And they didn’t have the information. I said, why don't we cancel the meeting and come back next week when you have the data? I'm sure that Google sales representatives who are taking you to the expensive lunches and selling you the 3,200 words have that data. So why don't we get the data and then let, review the data?

 

And they came back the next week and we sat in a meeting and all of a sudden, I can tell you there's a little change in the faces. They had to wear it kind of down. Everybody kind of came in. I said, so what did we find out?

 

And they said, well, we've found out that 98% of our business was coming from 22 words. So, wait, we're buying 3,200 words and 98% of the business is coming from 22 words. What are the 22 words? And they said, well, it's the word Restoration Hardware and the 21 ways to spell it wrong, okay?

 

Immediately the next day, we cancelled all the words, including our own name. By the way, we are paying for the little shaded box above our words and said, oh no, we have to hang on to that because Pottery Barn might squat on top of us. I said, excuse me? I said, if someone goes to a mall or a shopping center and they're going to Restoration Hardware and there's a Pottery Bam there, they're already squatting, okay? It doesn't mean they're going to go into their store. If somebody wanted to buy a diamond from Tiffany and just because Zale's is sitting on top of them in a shaded box doesn't mean they're going to go to Zale's and buy a diamond.

 

I mean, I can't believe how many companies buy their own name and they're paying Google millions of dollars a year for their own name, like maybe if this is webcast, right, a lot of people are going to go, holy crap. They're going to look at their investments. They'd go, maybe we don't need to buy our own name. Google's market cap might go down...

One wonders how long before all retailers - most of whom are notoriously strapped for revenues and profits courtesy of Amazon - and other "power users" of online advertising, do a similar back of the envelope analysis, and find that they, like RH, are getting a bang for only 2% of their buck? What will happen to online ad spending then? And what will happen to the online ad giants, if the vast majority of ad spending that justified their hundreds of bilions in market cap is exposed as "bloat"? As Friedman politely, yet sarcastically put it, "Googles market cap might go down"...

Comments

Jack4952 Sep 12, 2017 5:18 AM Permalink

I may be the odd-man-out, but I have NEVER clicked on an online ad on any web site. MEVE R.If I am looking for something (recently a USB external backup hard disk) ,  I do a SEARCH on www.StartPage.com. (as opposed to www.Google.com)I then select appropriate web sites for the results of that search.I have nothing against online ads. But simply because a product/service is advertised on a particular web site tells me NOTHING about the quality of that product. I like to COMPARE the specifications of may brands of a particular product, then make an informed choice.For some reason I thought that almost EVERYONE did the same. Was in incorrect?

kiwidor Sep 12, 2017 1:58 AM Permalink

after i placed a photo of my precum-oozing stiffy online, i stopped getting penis enlargement spam. that shows you just how deep this adverdatamining shit goes. :) 

NaturalOnly Sep 12, 2017 1:06 AM Permalink

Google has made it so local business cannot rank. They do everything they can so you must pay for ads if you want to show up on the first three pages. They make their "local" box take up a lot of space.I was planning on advertising for customers. I looked up keywords in the category and they quoted .07 cents a click. I thought that was great. When I typed in the keywords into my account, they said I had to bid at least $1 for the words. It is a big con. I ended up scrapping the whole campaign.I think Google is making it so people are looking less on Google for things they want. They can't find what they are looking for, so they look elsewhere.I have been hearing about great results for local businesses on Facebook. That is where everyone is all day. You have a large space to make your pitch, and it costs less than Google. I posted an ad for a class, and had 5 people sign up in 30 minutes. Can Google do that?????????????????????????? 

1.21 jigawatts Sep 11, 2017 11:38 PM Permalink

Advertising is sooooo Jewy. The Goyim are becoming more inoculated to its faggy cheesiness. I love the major-key, ticky-tack, throw-away, "upbeat" background music in EVERY SINGLE AD.Keep it up, kikes.  The Goyim know.

CC Lemon Sep 11, 2017 10:57 PM Permalink

I can't believe anybody can't come up with the breakdown of adword spend right away. I used to by ads and that info is easy to get.Google ain't the only culprit, they make it easy to manage and increase the efficiency of your ad spend.That paying for the 2% is more on that particluar unnamed dude in the conversation.

Westcoastliberal Sep 11, 2017 10:54 PM Permalink

I'm in the biz and this article is highly misleading.  It all depends on how they're determining sales from clicks. It can't be from raw traffic. The stats might work okay online, but for brick and mortar biz, you really can't track it, no matter what your "data" might imply. Too much of a gap from online to actual visit, and the "itch" cycle has to be taken into account.  G**G has done this to themselves with G**G analytics.  It's garbarge in, garbage out.  It all goes back to the age old question, and I think it was J Walter Thompson himself who said "I know half of my advertising is working....just not which half.Also sounds to me also like RH got some bad advice, 'cause I sure has hell wouldn't have put them on 3,200 keywords, and sure as hell wouldn't spend money on supporting their "name" if it didn't need reinforcing.http://www.yougotclicks.com

koan Sep 11, 2017 9:23 PM Permalink

Proctor and Gamble stated digital advertising is bullshit, they quit theirs and their sales continued to grow.
For sure it's bullshit when it's Facebook.

Grumbleduke Sep 11, 2017 9:05 PM Permalink

in the timeless words of Bill Hicks on marketing and people in marketing: No this is not a joke. You’re [going], “There’s going to be a joke coming.” There’s no fucking joke coming.You are Satan’s spawn filling the world with bile and garbage. You are fucked and you are fucking us.Kill yourself. It’s the only way to save your fucking soul.https://www.youtube.com/watch?v=ouE-CcwE8Ls

I Write Code Sep 11, 2017 8:39 PM Permalink

Exsqueeze me, but did he say that his marketing staff didn't have the ranking of those 3200 words tattoed on their arms?  I think I see where some more cutbacks would help.

ElTerco Sep 11, 2017 10:20 PM Permalink

This is an excellent example of what I dealt with every day at work before I retired. All the younger people just "knew" the right thing to do because some hyped vaporware campaign claimed it would work, or some professor that had never solved anything beyond contrived toy problems told them it was true. Very few young people make decisions about "what will work" based on their personal experience in solving similar problems, yet somehow they still believe they are experts.

It's kind of like self driving cars. There is no data people. You don't "know" autonomous cars are going to save lives until every car on the road is self driving and you compare those results to current results. On the way there though, we will have to spend trillions of dollars, yes trillions, to add the infrastructure that would make self-driving cars actually work with similar accident rates to today. Furthermore, we will lose almost all freedoms in the process. Bravo, millennials and idealists, Bravvvvo.

ElTerco runnymede Sep 13, 2017 3:04 AM Permalink

I agree -- for most things in life.

What you take on as your profession though, the only way you add true value is to really understand what you are doing, nuts and bolts, all the way down.

That's why it's a job they pay you for, and that's why one gains the reputation as a professional outside their organization.

In reply to by runnymede

DaBard51 Sep 11, 2017 6:21 PM Permalink

Shameless plug:  Firefox & uBlock Origin.Clean, fast web experience.   When nine hundred years old you become, you will have no idea how many ads I've ignored.

gdpetti Gobble D. Goop Sep 11, 2017 6:43 PM Permalink

Funny, but this is S.O.P. in the industry... and all the advertisers/marketing personnel know it's mostly BS.... but like in school, it usually comes down to repetition... that and as we all know, 'word of mouth'... outside of that, online, price is a large determining factor if the product is the same.. as more and more people are learning how BS'd so many of the comments are... especially those with full stars... but maybe AI can make better fake reviews?

In reply to by Gobble D. Goop

Pernicious Gol… Sep 11, 2017 6:07 PM Permalink

Almost any time you do a business-related search, every result is an ad. Search on "restaurant X" and you will get page after page of review sites and ads. You probably won't get the restaurant's own Web site.The Internet has switched to hiding information you want, and trying to give you only information they want you to see.

FreeNewEnergy Sep 11, 2017 6:01 PM Permalink

Just a note to all you people who sing the priases of adblocking technology: without revenue, many sites would cease to exist. Many rely on advertising for at least part of their revenue, the ones which are there just becuase they wnat to make money showing ads are all shit anyhow.So, advertising is a necessary evil from both sides of the coin. If a business doesn't advertise, it's often difficult to grow and/or maintain/take market share.Advertising isn't evil, per se, just the way Google does it, is. The fuckers do NOT tell publishers what their split percentage is. In other words, Google could be taking 90% of all the revenue your site generates, without you knowing it.They're garbage. Time to move on from that overstuffed windbag of a search engine.Personally, I never liked the Pay-per-click model. I have a number of companies that pay me on a pay-per-view basis and they're eating Google's lunch and I love it.

fpdguy Sep 11, 2017 5:23 PM Permalink

No agency, just 14 years of running my own adwords campaigns.  After a while you start seeing the patterns of what converts and what doesn't -just like the buying patterns you see in any other industry. 

fpdguy Sep 11, 2017 4:45 PM Permalink

It sounds much more like Restoration Hardware had some pretty awful folks managing their online campaigns.  It's the right call to go ahead and cancel that ad spend if the folks managing it don't know what they are doing, but reallly they should be firing the folks running the campaign.3,600 keywords is a pretty small amount for the type of product spread that Restoration Hardware has.  They probably stuck with overly broad, poorly converting keywords like "leather couch" -where the traffic is going to be larger, but maybe just looking for pictures or aren't "asking buying questions" just yet, as opposed to "distressed top-grain leather couch simon li" where someone already has in mind what they want and are probably pretty close to pulling the trigger.I'm all for finding avenues of reaching customers that don't involve a frivolous ad spend with Google, but to ignore that a sizeable (maybe even the majority) of your customers are going to be making their final purchasing decision based largely in part with the results of their Google search -then bowing out of this medium seems to either suggest that the CEO is very unaware of how his customers find him or his competitors or that they have bigger financial issues that they are trying to paper over in the short term by trying to convince their investors that they reduced wasted ad spend.

ElTerco fpdguy Sep 11, 2017 10:09 PM Permalink

"a sizeable (maybe even the majority) of your customers are going to be making their final purchasing decision based largely in part with the results of their Google search"

The truth of this statement probably depends on whether they are looking for a very specific item, or doing a general query. Personally, I make general queries and almost never buy from a specific place based on search results unless I can compare price among competitors to choose the lowest one.

In reply to by fpdguy

Mazzy Sep 11, 2017 4:34 PM Permalink

I can tell you from my experience in psyop that real-world high-viz and tangible items are the two best forms of advertising, yep yep, even in this millennium.  If someone can stick your business card under a magnet on their fridge customers will likely be calling you if you when they need your service. 

SweetDoug Mazzy Sep 11, 2017 8:34 PM Permalink

''''The only advertising I pay attention to with any effort, is the grocery flyer. Andwhat I choose to pay attention too.That other bullshit advertising only works on those on-the-spot-purchaser-types who are idiots.And there really aren't that many of them of them.Spot on about the business/recommend idea.A buddy of mine paints. He does a boffo business. His secret? When a customer calls him, call'em back.He said he continually gets people surprised, when he calls them back.Astonishing.OJOV-V

In reply to by Mazzy

Puerto Rico is… Sep 11, 2017 4:25 PM Permalink

Makes you think the real reason this yuge tech companies are buying into other markets. They know ad revenue is sitting on a house of cards and are trying to diversify away from it before the shit hits the fan in the next recession (depression?).

NoWayJose Sep 11, 2017 4:18 PM Permalink

People are going directly to the sites they want to see. For retail they already 'know' that they want Dress Barn or Macy's etc. Google is killing itself by presenting too much crap (sometimes repetitive) --when you search for 'antique door hardware' - and many such links presented are dangerous! I rarely search any more.

MCDirtMigger Sep 11, 2017 4:14 PM Permalink

In over 30 years in business, I have not spent a single dime on advertising. Everyone of my sales comes from referrals and handshakes. Provide a good service at a good price, and keep your promises and folks think you've reinvented the mouse trap.

BingoBoggins MCDirtMigger Sep 12, 2017 1:50 AM Permalink

pre-recession - 2011: we were dyin' for work (tradesmen), the big Union shops were veven fighting over scraps, the market reduced to the lowest under the table bidder on more multi-residential piece work, fuck the quality and get out  - I put a three line ad in the weekly paper. a stupidly simple moniker and hyphenated one word services and contact number.i made a living like that for three years half or full time, small, repair or rehab jobs. Why?I always did what I said I would do. I listened to what the customer wanted, I always gave a little extra of my time. I offered them my trust - no money up front.Every client was a referral except for the Curmudgeon. Nothing would please the Curmudgeon. Why should it? that's his job - to keep us honest. 

In reply to by MCDirtMigger

Mazzy MCDirtMigger Sep 11, 2017 4:40 PM Permalink

My boss says that by simply picking up the phone people are amazed.  Customers have already called and if someone doesn't even pick up the phone that customer moves onto the next company.  When someone does finally pick up the phone they're so excited they set up an appointment/estimate/service call right then and there.It really is simple.  I've learned a lot about how to handle my own business down the road (about 3 years from now) just from watching my current boss.  Word of mouth and a simple business card (I guess you can call that an advertising expense) are all you need and the "invisible hand of integrity" takes care of the rest.

In reply to by MCDirtMigger

Nobodys Home MCDirtMigger Sep 11, 2017 4:28 PM Permalink

That's the way to run a good reputable business.

Consider this. During one year, I had no product, no information to sell, nothing but online affiliate relationships. I took no orders, shipped no product, delivered nothing of productive value. I bought domain names, linked them to well designed jump pages and sent people to the companies I was an affiliate of to find the products they were looking for. I spent $33K on advertising and made $8500 in profit. Around 26% return on investment sitting at my desk at home, while I was going to nursing school. Of course, it's much harder to do that nowadays. But advertising done right, does produce profits.

In reply to by MCDirtMigger