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Digital ads: More expensive but reaching fewer consumers

How would you like to pay more and get less? That's the current state of digital advertising, where online advertisers are paying way more to reach audiences than they were a few years ago, but it's still getting harder to reach customers

The average digital advertisement today goes for 12 percent more than it did two years ago — a price hike five times the rate of inflation and 70 percent more than television advertisements, according to a new report by Adobe Digital Insights.

Adobe tracks billions of responses to paid searches through its marketing cloud service. While desktop display ads — the pop-ups and banners that were the hallmark of the earlier internet — are worth less today, video, search and mobile ads more than made up the difference.

That price appreciation is great news for web behemoths like Alphabet and Facebook, which control the lion's share of the digital advertising market. But it's a less sunny stat for the advertisers themselves, which are likely getting less for each dollar they spend, according to Adobe's analysis. Advertisers are paying more simply to keep their customer bases while engaging in fierce competition over new customers.

"We're no longer in a period where you can just get organic growth," said Tamara Gaffney, principal analyst at Adobe Digital Insights. "Now it's a dog-eat-dog competitive world."

U.S. spending on digital advertisements is expected to hit $83 billion this year, surpassing total TV ad spending for the first time, according to a recent forecast by eMarketer. The majority of that revenue is expected to go straight to Google and Facebook, which accounted for nearly all of the growth in ad sales last year.

Google dominates the search market, while Facebook is stronger in display. Both companies have made strides in mobile and video. Mobile accounted for 83 percent of Facebook's ad revenue last year, compared with 77 percent in 2015, according to the company's filings. For Google, mobile ads are about half of the company's ad revenue.

The companies themselves report a number of different per ad revenue metrics. Facebook's "average price per ad" measure increased by 5 percent last year and 140 percent the year before. In contrast, Google's "aggregate cost-per-click" across the segment fell by 11 percent in both 2016 and 2015, a decline the company attributed to "continued growth in YouTube engagement ads where cost-per-click remains lower than on our other advertising platforms." (Adobe's data includes billions of TV-everywhere views, but not YouTube).

"The majority of the digital ad spend is in search and the majority is going to one company," said Gaffney, referring to Google. "That company is getting a lot, but the ability to translate into more people coming to a site is getting harder and harder, and then when they get to the site, they don't stay as long."

Less bang for your buck

Digital ads may cost more, but that doesn't mean they're more effective. Take search advertisements, for example — over the past two years, advertisers have increased their total spending on search by 42 percent, but the number of visits to advertisers' websites resulting from those ads has increased only 11 percent, according to Adobe.

In fact, the total number of visits to U.S. websites has declined by about half a percentage point in the last three years, according to this year's ADI Mobile World Congress report. And when they do visit a website, consumers spend less time there — average site visit time has fallen by 6 percent in the last year, according to Adobe's data.

"People don't browse around as much and they disappear off the site when they have to do something else," said Gaffney. "They're using bits of time that aren't as lengthy as a bit of time when I sit down in my living room."

It's also possible that online experiences are simply becoming more efficient — people can find what they need and leave much faster — but either way, those declines mean that advertisers have fewer opportunities to connect to consumers and websites offering ad impressions have less inventory to sell.

Advertisers are also still struggling to adapt to mobile video. Ad impressions by mobile video are growing while desktop impressions are falling, but many ads are formatted only for desktop viewing, creating experiences that are unlikely to engage potential customers. And sometimes a few big advertisers are the only buyers in a market, forcing viewers to watch the same video ads over and over.

In Adobe's surveys of advertisers and consumers, there was a notable gap between how each group rated their ad experiences. Over half of advertisers said they're doing better at serving valuable ads, but only 38 percent of consumers agreed.

"There's still quite a bit of putting their toes in the water and trying to figure it all out," said Gaffney.

Dimes to quarters

The cost of reaching out to potential customers through television ads only began to outpace inflation in 1997. The same is true of Super Bowl ads, which only became as expensive as they are today in the last two decades.

By analogy, Gaffney said that some types of digital advertising could be at the beginning of a long uphill climb in prices. While the price of the old-fashioned desktop display ad has fallen because that ad inventory could be bought anywhere, search and social ads tend to be controlled by Google and Facebook, respectively.

"With these very big players you have the potential for auctions to be happening only on their network," said Gaffney. "Display has a lot of different places you can go, and that's why you don't see the same rising cost situation."

Right now, much of organizations' digital advertising budgets go into search, but even a small shift toward mobile would make a big difference for companies offering those services. Advertisers look to Facebook first, but an advertising increase in social could trickle down to companies like Snap as well, said Gaffney. Companies will likely be more willing to invest in new ad options as targeted ads improve and early issues are ironed out.

"The people doing the buying should in theory be getting better and better results, and it should be worth it," said Gaffney. "If they can put in a dime and get back a quarter, then they're going to keep putting in dimes."

Disclosure: CNBC parent NBCUniversal is an investor in Snap.