I’ve been talking to a lot of SMB ecommerce players lately, especially in areas such as lifestyle, fashion and homeware. Most of them have tried online advertising, but backed off. They looked at the conversions, decided the numbers did not add up, and instead focused energies on customer service, email lists and social media.

I’ve also been talking to a lot of shoppers, and I see many cases where a shopper converted into purchaser two or three *months* after initial discovery. That rarely gets captured in the retailer’s ad campaign ROI calculation, so it begs the question of whether they are misreading the efficacy of their advertising.

Another example of marketing leading to unmeasured conversions came up at the recent Social Currency CrunchUp, when News America’s Ginny Byrnes said, “Customers recall seeing a coupon promotion, so even though they might not be redeeming the offer, they are still purchasing your product.”

The discrepancy from my talks with both etailers and shoppers makes me wonder if the seemingly “concrete numbers” that come with search advertising has been too seductive. People love feeling like their decisions are scientific — it feels less risky than a judgement call — and will often accept weak data just to have data. Doing business without analytics would be like driving a car blindfolded, i.e. dumb, but I also think we live in a world of imperfect information and judgement holds a strong place as well.

Just thinking out loud, trying to evolve my thoughts.

Some other posts you might find interesting:

• Jonathan Mendez, Online Advertising is Not an Intent Generation Channel
• The Tail, Clickable on Search-Engine Marketing for Smaller Etailers
• Jeremy Liew, Why online brand spending will create new winners in online ad networks
• Darren Herman, The Advertising Collision

A few entrepreneurs have written lately about the blurring of ecommerce and advertising (albeit advertising that is about driving a sale rather than building brand affinity). I agree; Aprizi’s attempt to build a “Pandora for online shopping” shares some traits with ad targeting efforts because in the end we’re all trying to improve relevance.  I want to highlight a key difference: the respect for consumer data and privacy.

Hunch, Blippy and Aprizi all have a goal of understanding consumer preferences in order to get them what they want.  We all happen to be taking very different approaches, but there is one core similarity: we are all opt-in services.

There is a simple bargain at work here: the consumer provides information in exchange for an attractive value proposition.

Contrast this to what is happening with behavioral targeting and the sketchy world of cookie dropping and behind-the-scenes data sharing.

When I go to a retailer’s website, I fully expect them to be tracking my every move in order to optimize their ability to convert a sale.  If tracking helps the retailer make better suggestions, then great — I’m on their site after all.  What I don’t expect is for them to be sharing that data with a third party, or enabling a third party to drop a cookie.

This isn’t a new issue.  Long before the Internet, retailers were allowed to sell your name, address and purchase behavior to data co-ops.  I think consumers have largely been ignorant of what goes on behind the scenes, and while they continue to let it slide, is that really good enough?

None of the self-regulation ideas I have seen from the ad industry sound all that effective to me. A little icon no one will notice?  These band-aids allow the ad industry (including complicit online retailers) to skate under the realities of consumer behavior on the web (i.e. what consumers actually see and do).  I for one am glad that regulators are starting to take a closer look at this issue.  I am also curious to see what kind of better (and default) controls emerge from the browser developers.

However, I’ll also state explicitly that I come from the applications world, not ad-tech, so if you disagree with my perspective or think I am missing something, I’d love to hear it.

Interesting resources to track on this issue:
- Better Advertising
- Stephen Kline’s twitter feed
- The Future of Privacy Forum
- Bynamite is a startup trying to focus on these issues directly

A few months ago, I listened to a panel organized by Battery Ventures called “Monetizing Social Media”.  Perhaps not surprisingly for a New York-based event, the panel spent 99% of the time talking about advertising.  Still, I was surprised to see both the Facebook and MySpace representatives brush off microtransaction business models as niche and not worth discussing.

The total advertising market is certainly much bigger than virtual goods, so I can understand why they keep trying to capture ad spend dollars, but when you look at companies like Tencent and watch the rapid growth of micro-transaction based apps, the dependence on advertising starts to feel a bit like wearing blinders.  However, notwithstanding the panelists statements, both MySpace and Facebook seem to be working on virtual currency strategies, and they are smart to diversify since ad dollars still aren’t racing their way.

eMarketer now forecasts that advertising in online social networks is going to fall 3% in 2009, although they do think it will recover in 2010 and grow 10% above the 2008 levels.

After pouring so much effort into advertising, will they understand enough about virtual goods to capitalize on the new model? That remains to be seen. Facebook’s neglect of its gift system has not been a good sign, but perhaps times are a-changing.

The point is not that micro-transactions are the new savior to socnets.  Advertising will be an important revenue source.  However, as the music industry is learning, diversification of revenue streams is the name of the game.