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

NoDebt Blythes Master Mon, 09/11/2017 - 14:34 Permalink

"Does anyone else see the irony of this ad article here on ZH whom has an obscene amout of ads choking up the content here?"We thrive on contradiction.  If you can't hold two diametrically opposed thoughts in your head simultaneously you have not achieved what the modern age calls "enlightenment".Just imagine what went through Tyler's head when he posted this up on his own board, supported largely by digital ad spend.

In reply to by Blythes Master

tmosley MozartIII Mon, 09/11/2017 - 14:44 Permalink

You should get brave for your phone. ZH actually works with it.Also, thank GOD Google is getting fucked on revenue here. There was a real and present danger brewing that they would be the ones to create AGI, and that they would twist it to some partisan goal. Hopefully the best talent will all leave and form another company focused on that greatest and final goal.

In reply to by MozartIII

FreeNewEnergy Benjamin123 Mon, 09/11/2017 - 17:41 Permalink

Sure, let Google try that. Then me, with five websites, would tell Google, OK, bye. You'll miss all the clicks I generate. Then thousands of other webmasters might finally wake up and discover that Google has - for years - been making bank on THEIR content.Google is nothin more than what we in the industry call a "scraper." They scrape off bits of info and re-present it in another format. In Google's case, that is the format of a "search."There will be better ways to access the information one wants on the internet and Google won't be it.If Google and Facefuck's revenues fall substantially, it couldn't happen to nicer folks.BTW: I have been trimming the number of Google AdSense ads on my sites for the past two weeks and it's getting to the point at which I may eliminate them altogother. I have other ad serving companies which aren't secretive, deceptive and don't play fucking stupid mind games like PageRank, which is total bullshit.

In reply to by Benjamin123

Benjamin123 FreeNewEnergy Mon, 09/11/2017 - 18:23 Permalink

Possibly, but services like Google's or facebook tend to work as natural monopolies. In Google's case since everybody uses it, if you are not also in, no one will find you. I should be more accurate: If your are not on google almost no one will find you.If there were two equal googles, one would shrivel and dissapear and the other would monopolize. All search engines besides google are fringe, yahoo, bing, nobody uses them. Duck duck go has nothing going for it except for a promise of secrecy, from its jew founder.Of course you say "if enough people wake up at the same time... blah blah". It never works like that, the bigger Google is the harder it is to quit it. Idem for facebook, though facebook is useless.I dont think people ever collectively do any kind of massive "wake up" in any context, revolutions against a central power never take the form of masses waking up, it happens but the dynamics are different.

In reply to by FreeNewEnergy

BarkingCat Benjamin123 Tue, 09/12/2017 - 08:33 Permalink

Bullshit.  There are alternative and they are not fringe.Lots of people use them. Google can easily be dethroned. Hell, as much as I don't like Microsoft, it does have Bing as an alternative.They started off as a little guy and I remember first time being show Google by some chick at work whose boyfriend was a Linux admin.She liked it simply because it was just a clean search page and not a portal.There are enough examples of a leader loosing its undisputed position in the tech industry. The game consule is a good example.AOL, MySpace.

In reply to by Benjamin123

BarkingCat Benjamin123 Tue, 09/12/2017 - 08:16 Permalink

They could but then people who search using Google and don't find it will try another search engine. Google has been fucking around with search results forever.I have in the padt put in a name of a company and when the results came back that company was further down the list, sometimes even not on the first page.Fuck Google.

In reply to by Benjamin123

waspwench tmosley Mon, 09/11/2017 - 16:09 Permalink

Anything which will reduce the power of Goolag/Facebitch is a very, very good thing.These two companies have far, far too much money and far, far too much influence and it is obvious that they intend to use it for dangerous and destructive purposes.A responsible government in a free society would have had them investigated for monopolies violations and  interference with free speech.   We no longer have a responsible government, nor do we live in a truly free society, so the only thing which might save us is loss of revenue which will undermine their power.

In reply to by tmosley

MrFriskles Bobportlandor Mon, 09/11/2017 - 15:16 Permalink

You guys are so quaint with your pure ad blockers. AdNauseum is the next level fuck over. Not only does it BLOCK EVERY AD, IT ALSO CLICKS EVERY AD in the background.Google does freqent audits and has to pay back money to the companies whos ads were clicked by "scripts." So not only are you fucking up their algorhythm, you are making them pay out the zadnista and eroding confidence in their company!adnauseam . io

In reply to by Bobportlandor

philipat TwelveOhOne Mon, 09/11/2017 - 22:20 Permalink

That's the first acknowledgement I have seen regarding this problem at ZH despite several attempts to raise it earlier. Clicking up/down votes caused me so many problems with Firefox that I had to change to another browser JUST for ZH. Even now, to vote, I have to wait 10 seconds until a warning box regarding "Long-running script" has appeared and cleared before I can vote. Then, after the second vote, repeat all of the above again; and so on.

In reply to by TwelveOhOne

TwelveOhOne philipat Fri, 09/15/2017 - 18:48 Permalink

I've been using the Brave browser to read ZH for exactly that reason.  No issues with clicking multiple votes.I used to use this pattern: click vote; hit F5 (or Ctrl+R, to refresh).  That generally took a second or three -- never as long as a second vote click would take.Or, I'd scroll so the item I was voting would be at the top, so I could continue to read while it was frozen.Glad to be using Brave now!

In reply to by philipat

Conscious Reviver Bobportlandor Mon, 09/11/2017 - 22:09 Permalink

The "commercial internet" was always about the spying, the data collection. It was all about 'the sheep do what, when '. The buying of ads is a tax on the corporations to subsidize the spying agencies. Of course the corporates like 'the sheep do what when' info too and get to keep, buy and sell whatever they can come up with on their own.

In reply to by Bobportlandor

philipat coded language Mon, 09/11/2017 - 22:24 Permalink

I also ditched Firefox because of the well-known "memory leak" issues, especially if more than a few tabs are left open. The nice thing about Opera is the free VPN, which works well other than for downloading large amounts of data, where a paid VPN is essential. But for everyday browsing protection, an Opera Private window with the free VPN engaged is a great solution.

In reply to by coded language