The Promise of Digital Advertising

Once again, digital advertising looks very promising--and this time, it's for real and here to stay.

As recently as 2004 online vehicles attracted only 5 percent of ad spending, even though they captured a significantly larger share of media attention. However, over the next 18 months we expect spending on digital marketing to soar as high as $23 billion in the United States--that's 11 percent of measured spend. Some major U.S. advertisers plan to spend 15 to 20 percent of their 2006 budget online, and some pure plays already spend much more.

This shift bodes well for CRM departments. Their skills will be paramount for marketers trying to manage advertising campaigns across the broad set of complex digital vehicles (banners, paid search, wireless ads, and even advanced TV).

This time around it's easy to understand the digital hype. Teens are leading a growing consumer trend toward spending more time in front of PCs and on cell phones than in front of TVs. Digital tools, such as online video, paid search, and banners, are currently more cost-effective than traditional media, sometimes by a factor of five.

After significant research, as well as interviews with dozens of advertisers and media companies, we have concluded that this hype is justified, but only for the right brands supported by people who leverage the right skills and use the right vehicles for the right marketing objectives. Even marketers who devise a winning formula will have to contend with limited digital inventory.

To compete, many marketers will need to master a whole set of new skills and behaviors. They will, for example, need to know how to manage a broad set of advertising vehicles through closed-loop testing. They will also need to understand the marginal economics of products and customers to know what premiums to pay for targeted advertising. And, they'll need to learn how to drive campaigns that can leverage the interactivity and viral nature of digital media.

Credit card providers and other advertisers with strong direct-response programs and world-class CRM capabilities are well on their way to getting their spending levels and processes right. For others, brand characteristics, including target audience, brand identity, and transaction size, should drive the urgency and scale of the digital marketing effort. We believe several areas will experience the greatest upside in the next two to three years, specifically:

automotive, pharmaceuticals, and consumer electronics, where marketers can reach consumers who are researching products online and help drive decisions about high-ticket transactions;

retailers, which can use targeted media to deliver offers and digital loyalty tools like wireless text-messaging campaigns to drive repeat purchases; and

consumer packaged goods companies with hip or niche brands.

But advertisers in other sectors aren't off the hook. Over the long term they will need to learn how to effectively use new digital ad formats at scale as well. In time, as consumers watch more video on PCs, mobile devices, and advanced-digital cable TVs, metrics and standards will emerge, traditional agencies will gain skills, and advertising inventory will expand.

For many large advertisers these developments will require a new way of thinking about digital advertising--the transition process should begin today. We recommend that marketers get ready by building new capabilities around their highest potential brands. Doing so will create the capabilities platform that will be the table stakes for marketers in the coming renaissance of digital advertising.

All of this is good news for CRM departments that can nimbly deploy their resident skills and data. As we see it, CRM will be the critical differentiator among advertisers trying to navigate this next big wave in the digital era.

Christopher Grosso and Bart Sichel are associate principals, and Amy Guggenheim Shenkan is a senior practice specialist, at McKinsey & Company's global marketing and sales practice.

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