Lecture 7: Advertising

Traditional advertising, such as TV, radio, billboard, print ads, usually use impression as a unit to measure price and value. Impression is the frequency of advertising showing up. Traditional commercial media charge sponsors based on cost per thousand impression or mille (CPM). Super bowl is an extreme case that cost per impression is very high. All these traditional advertising focus on the frequency of ads appearance rather then the effectiveness of the commercial. Sponsors can spend a great deal of money but do not obtain expected return, since the budget spent on advertising is not positively related to income, placing a huge risk for a firm when spending millions dollars to advertise via traditional media.

In the current age, Google introduced a totally different view of advertising. Instead of requiring a fixed fee up front, Google charge by clicks rather than by impression, so sponsors will not be charged because of their ads showing up on the search list. To maintain the quality of its search engine, Google ranks ads by a function of charge per click (CPC) and quality score, so people can not raise their ads' rank by simply direct tons of traffic to website. Capturing irrelevant traffic just for increase in CPC is not rational. First, it will cost you a lot of money, since Google charge you by click. Second, people will earn a opposite effect, lowering rank of ads, since based on visitors' behavior in the website, Google will interpret the website is not effective and lower its quality score. Google does not reveal the factors of quality score. The only information we know is that click through rate (CTR) is positively related to quality score. Actually, it's a mutual beneficial mechanism. Increase in CTR means that more visitor conversion in the website, helping sponsors move toward business objectives.  Also, Google improve its search quality by increase in CTR, that is, users get more effective information they want.

To sum up, although online advertising seems more appealing than traditional advertising. We can't deny that traditional advertising market is still necessary, especially TV commercial. People spend time watch TV show, sport games. Online advertising provides an alternative for companies but is not able to replace the traditional ads in short term.