August 14, 08

By Joe Michaud

    New technologies and networks in behavioral targeting will dramatically alter the business of companies involved in the online classifieds space.

    Behavioral targeting, known as BT in industry parlance, is a hot topic right now, with recent predictions of billions of dollars in ad spending in just a few years. But there has been little discussion about the huge opportunities specific to the classifieds business.

    Reaching consumers with buying intent has always been the core value that advertisers sought from classifieds sites. (As usual, we apply the term “classifieds” in its broadest possible sense.)  BT will take that a major leap forward. Classified sites will become a critical part of the infrastructure that captures and understands consumers’ buying intentions, enabling advertisers to reach those same consumers as they move around the Web.

    The business is still in its early stages, but moving fast. Technology is still evolving, public policy is evolving, business practices are evolving. But the risks and opportunities are coming into focus. 

    “Behavioral targeting has moved from the VP level at agencies to the media-buyer level in just 12 months,” said Jeff Hirsch, CEO of Revenue Science, a leading BT provider. “We’re seeing it in every RFP now.”

    Dave Morgan, founder of Tacoda in 2001 and a BT pioneer, predicts targeted advertising will grow to $10 billion globally in five years. Morgan sold Tacoda to AOL last year, and is currently out of the business, but remains passionate about the topic. “It’s likely to be bigger globally than in the U.S,” he told us. “The Chinese market is growing fast.”

    Considering that behavioral advertising is a $775 million business in the U.S. today, according to EMarketer, and is expected to hit $4 billion in the U.S. alone by 2012, everyone in advertising should be paying attention. And if those big numbers don’t get your attention, consider these: According to Morgan, when the Tacoda system started powering ads around AOL e-mail, the average CPM yield exploded from 30 cents to $4.25.

The basics of BT

    Let’s start by looking at some of the basics of BT, what it means, and how it works. Then we’ll look at how BT will affect the classifieds business.

    At its simplest, BT is about “targeting people, not pages.” To do that, data is collected – anonymously – about users’ search queries, the sites and pages they visit, ads they click, information they share.

    Take the example of a running-shoe company. The company puts ads on the pages of sites intended for runners, as its primary way to reach those customers. That’s the idea of “targeting pages.” 

    Moving toward BT means the company will be “targeting people” – advertising its wares to runners anywhere on the Web, not only in the context of running content, but also on any other page that runner might visit.

    To make that concept a reality for the shoe company, important elements are required:

--- A way to identify an individual as a “runner” – likely through anonymous code embedded on her computer when she visited a running site.

--- In conjunction with that code, sophisticated artificial intelligence to interpret her patterns of Web usage and predict her interests. For example, is she a marathon runner or a casual runner? Does she have a high income, or a more modest one? This information is incorporated into her  “behavior” and becomes part of the anonymous code that enables the “targeting.”

--- A common protocol or network to track that code across thousands or millions of sites.--- A process for buying and managing campaigns targeting desired behavioral patterns – for instance, helping this shoe company send different campaigns to marathoners and to casual runners.

The current focus on BT

    The prospect of highly targeted advertising and content has been one of the key promises of the Web since it emerged in 1994, and those elements have been widely understood for at least the past seven years. But BT has become an especially hot topic in the past few months.

    There are several theories for the sudden surge of interest: Inventory on high-demand niche sites is maxing out; advertisers are tightening budgets in the down economy; agencies are becoming more sophisticated in their approach to online advertising, and high-profile companies like Yahoo are placing much more emphasis on the topic.

    Just this week in Washington D.C., lawmakers continued discussing concerns whether Internet companies’ ability to track consumer behavior runs afoul of U.S. wiretapping laws. The governments of Europe have yet to specifically target behavioral-targeting activities in legislation, but privacy laws throughout the continent are already pretty stringent. Consumers there are have already exhibited fierce opposition to the collection and exploitation of their browsing habits for advertising purposes.

Targeted classifieds

    Even in an opt-in scenario, the implications for the classifieds business are far-reaching.

    Because most users of classified sites are seeking to make a transaction, their behavior on the site (and elsewhere) becomes extremely valuable information.

    A visitor to an auto portal, for example, soon demonstrates his stage in the buying process, the types of cars he’s interested in, his likely price range, and more. Certainly that information is useful on the site itself, to create a more customized experience, and to deliver ads more targeted to the user’s demonstrated interests. But no matter how much this user enjoys that one auto portal, he likely is spending only a fraction of his Web-browsing hours there.

    That’s where BT comes in. The operator of the auto portal has a lot of opportunities to build business from that user’s behavior.

1.    Most directly and obviously, charging a higher CPM for ads on the portal that target only users matching certain behaviors.
2.    Offering advertisers the ability to follow a user outside the auto portal and continue delivering relevant ads on other sites the user visits.
3.    Perhaps more significantly, packaging its users’ behavior data and allowing a network or agency to “retarget” those users elsewhere on the Web.

   Staying with this example, a visitor who spends only a little time on an auto portal may be worth very little in terms of ad revenue on the site specifically. But his behavior on the site, especially when linked to his behaviors elsewhere on the Web, could paint a picture of an individual in the final stages of deciding between a new Mercedes and a new BMW. The value of that small slice of data from the auto portal would be very high to certain advertisers.It’s important to note this example is unlike traditional vehicle “lead generation” because the user remains anonymous and has not provided any direct contact details. The value to advertisers, and the site, is the ability to deliver highly relevant display ads to the user, for example a BMW ad comparing its benefits to a Mercedes.

Examples in other classified categories could include:

--- Spotting individuals in high-demand occupations such as respiratory therapy, perhaps through their activity on a participating industry site. If that person visits a recruitment site, even briefly, it can trigger a hospital’s recruitment ad campaign on other sites she visits. The employment site gets paid, along with the industry site and the sites where the ads appear.

--- Identifying prospective homebuyers, their preferred locales and their likely price range based on their activity on a real estate site, and allowing a developer to “retarget” those customers on other sites, most likely through an ad network. Different types of homebuyers would see different offers – a condo development for one customer, a luxury home for another.

--- Assembling browsing and buying behavior on a merchandise or auction site and packaging that data into high-value “behavior buckets” such as “antique collectors” or “audio enthusiasts.” Those “buckets” can be developed and sold by ad networks, with the merchandise site receiving a piece of the buy.

--- As noted above, auto sites can capture many levels of data, from the earliest stages of the purchase funnel to a customer who’s ready to buy. Auto sites will be able to receive revenue through their users’ activity, many steps away from the site’s own pages.

Autos, health, travel …

Indeed, Hirsch of Revenue Science considers automotive the area most ripe for BT.

   “Auto manufacturers have embraced BT more than most,” he said, primarily because inventory on auto sites is in high demand. “Any industry where you have a high level of contention for (ad) space is where you see a lot of interest in BT.”

    Other categories where Hirsch sees “contention” for ad space: travel, technology, health, shopping.

    Automotive is also the subject of a Revenue Science case study. An auto dealer in the northwest wanted to drive more traffic to its Web site, so its ad agency tried BT from  Revenue Science. Users who visited the dealer’s site then started seeing the dealer’s ads as they went elsewhere on the Web. Revenue Science says the dealer saw a 60 percent increase in unique users on its site and a 73 percent increase in page views during the campaign. E-mail and phone call leads also increased, 29 percent and 98 percent, respectively.

    Even in simpler behavioral targeting, where the targeting is internal to a site or where it filters incoming ads based on user behavior, targeted CPM rates could increase by a factor of 10 over non-targeted ads – though likely shrinking total ad volume on a site.

What about privacy?

    There’s a battle over BT and privacy being waged at the U.S. federal level, and could affect the overall size of the business.

    However, specifically for classifieds sites, much of the opportunity also will depend on the technologies and business practices that emerge over the next year or so.

    For example, currently it’s technically possible – and legal – for an agency to place an ad campaign on an automotive site, capture user behavior via embedded code in the banner ads, and then resell the behavioral data to another advertiser on an unrelated site. In that instance, the auto site has created value – the environment that attracts the user and generates behavior – but receives nothing for that value.

     A new group, the Behavioral Targeting Standards Coalition, takes the position that “those who create the opportunity to collect data should own the data,” said Hirsch, who is on the coalition’s board. The BTSC hopes to clarify the business principles around BT, develop a common language about BT (“Every vendor uses different terminology to talk about this subject, and it creates a lot of confusion.” Hirsch said), and generally eliminate confusion among agencies, vendors, publishers about how BT should work.  It has more than200 members, including such diverse companies as Yahoo, Cars.com, Cisco Systems and EHarmony.

   A number of classifieds companies are BTSC members – including AutoTrader.com, Cars.com and McClatchy Interactive – but every company involved in classifieds advertising should be paying close attention to the issues of behavioral data rights and royalties should be high on the watch list of anyone involved in online classifieds. 

    Why?

   Because whoever owns the most user data wins.

Who has the best data?

   Here’s an example of the value of user data. You may think of Google as the gorilla online, but in a study by ComScore (see chart) Yahoo is far and away the leader when viewed through the lens of visitor data. Yahoo is in the best position to capitalize on sophisticated behavioral models because of the depth and breadth of its “data collection events.” In fact, there’s speculation that Yahoo’s BT strength may have been the prize that attracted Microsoft’s interest.

    Classified sites that position themselves as efficient, attractive, trustworthy gatherers of user data – and that develop clear business rules governing use of that data – should succeed (provided, of course, they don’t ignore other tenets of running a successful business). In some cases, that may mean re-engineering a site to enhance the user experience to maximize time-on-site and “data-collection events.” It could be retooling a business model to rely less on on-site advertising and listings, and more focus on off-site networks, alliances and programs.

    It’s entirely possible that the future value of your classifieds business could be less in its role as a destination for users and more as an attractive, useful, behavior-capturing way-station.
   
Action points

--- Think about your site in terms of user data-collection events. These are all sorts of points, like search queries, click patterns, geographic preferences and price ranges.
--- Focus on high-value “buckets” your users may fill: luxury homebuyers, recent homebuyers, ready-to-buy car shoppers, etc.
--- Pay attention to external forces that will affect you: public policy debates and the work of BTSC and others.
--- Consider likely alliances and networks that complement your own offerings.
--- Make technology decisions with future BT-enabling in mind.
--- Review your privacy policies and make sure they are BT-friendly, both for your users and for your business. Be prepared to describe BT in terms of benefits to your users.
--- Review your systems and workflow for ad creative and ad delivery, for their ability to handle multiple creatives within a BT campaign. “We should be showing people different creative depending on where they are in the funnel,” Hirsch says. “You want to reach the right person, at the right stage, with the right message.”

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