by Dr. Ralph F. Wilson, E-Commerce Consultant

We are in a period when banner advertising seems to be on the wane. You know, those rectangular, flashing boxes at the top of webpages on commercial sites. Click-through rates have dipped to 0.39% average and the industry magazines regularly carries articles discussing the death of banner ads. But while banner ads aren't as effective as they once were, the truth is that a great many companies, large and small, still use banner ads as part of their advertising mix and will continue to do so. Nevertheless, advertisers are becoming more sophisticated about when and how to use banner ads.

Defining Terms

To explore this broad and evolving type of advertising we need to begin by defining some terms:

You'd think that success would be easy to measure, but advertising has never been a simple art. Ad agencies have their unique self-serving spin, advertisers set their own objectives, and banner ad designers see something else again. Here are some of the factors involved:

Click Through Rate (CTR). This is a basic measure of how effective an ad is. CTRs range from the industry average of about 0.39% to 10%. As a general rule, the more targeted the site, the higher the CTR. For example, you'd expect an ad for Wilson Tennis Racquets to get a higher CTR on a tennis site than on a general sports site. A run of site on a general site such as MSNBC would get an even lower CTR. (Disclosure: I hold no financial interest in Wilson Sporting Goods, but wish I did.) Directories and search engines also sell banners ads that pop up when a particular keyword is entered. Thus your banner could show only when someone entered a searchword that included the word "tennis." However, the more targeted the banner exposure, the higher the CPM (cost per thousand banner views).

Cost Per Sale. A much more important figure is the actual cost of making the sale of a tennis racquet. In the final analysis, you don't care how high the CTR is if it doesn't result in a proportionate number of sales. What complicates this is the fact that your banner ads on the World Tennis Ratings site may actually sell fewer tennis racquets than those on NCAAChampionships.com. You can only make this determination when you use sophisticated tracking methods using cookies to separate the lookers from the buyers, and determine which sites and which banner ads had the best result. This kind of precision is enabled by using the DART ad server system from DoubleClick, as well as the sort of tracking used in affiliate software programs.

Branding. While CTR and cost per sale relate to direct marketing objectives, another way of looking at banner ads is as "branding" tools. They create brand awareness, and a brand image in the viewer's mind, whether or not the viewer clicks on the ad. But hopefully, when the viewer gets ready to make a purchase, those "impressions" (a wonderful ad agency buzz word!) will cause you to select Coca Cola over Pepsi, or Barnes and Noble over Amazon, or JCrew over Lands' End. Branding is very difficult to measure, but can be very powerful. Typically, only the larger and better-established companies have the budget to pursue branding consistently. Brand awareness is sometimes measured in surveys with questions such as: "What brand names can you recall in the field of tennis?"

While brand marketers may assess effectiveness in some fuzzy way, direct marketers look at any advertising method in terms of how many sales it produces immediately. Let me give you an idea of how the numbers might look for banner ads. Your results will vary, depending upon where you advertise and the effectiveness of your creative. Here are some arbitrary numbers to use in our calculation:

Cost per Visitor = CPM / 1000 * CTR = $10 / 1000 * .005 = $2

In our example, the $10 you spent to show the banner ad to 1000 people netted you 0.5% or 5 visitors to your site. Each visitor cost you $2 to get there. Hmmm. Not inexpensive. But now let's calculate what your advertising cost is per sale.

Cost per Sale = Cost per Visitor / Conversion Rate = $2.00 / .02 = $100

Oops! You mean it costs me $100 to get one sale? Yes, Virginia. Of course, if you have a 10% conversion rate rather than a 2% conversion rate, it only costs you $20 to get a sale.

What this all means is that banner advertising on a CPM basis can be expensive. If you have a compelling banner that 5% to 10% of the viewers click on, that can change the economics. If the price you pay for banner ads drops to $3 CPM, that can help, too. If you can pay a modest cost per click through, that would make a huge difference in the cost per sale. If you can pay a commission of 5% to 15% only when a sale is made, affiliate programs begin to look more and more attractive. But no matter which approach you use to pay for advertising, developing and placing 468 x 60 pixel banner ads is likely to be part of your advertising mix.