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Over time tasks and efforts that were once core become context. Doing business online was a core activity five or six years ago – it could differentiate your company and provide a strategic advantage. Today, if you have a modern ecommerce platform, sophisticated guided navigation/site search, personalized cross-selling, real-time inventory status for your physical stores with online ordering and local pickup or returns, and high-end website analytics to track your site traffic, campaigns, and visitor behavior you’re doing well but have no advantage what-so-ever over dozens of other retailers. As Moore predicted, core becomes context and the cycle repeats endlessly.

The challenge is that as time passes and your business grows, the percentage of your time and money available to spend on core activities – new initiatives that can drive growth and success – shrinks simply because you still have to keep doing all the existing activities too. For an online retailer or business, it’s easy to be consumed with the ‘day to day’ effort of managing website infrastructure, organic and paid search campaigns, site merchandising and promotions, basic reporting and occasional analysis. But all of these activities and more are simply the baseline these days – the minimum you must do to be competitive and marginally successful.

So what are the core activities in online commerce today? What should you be doing and thinking about to drive differentiation and advantage? What skills and initiatives need to be cultivated now in order to survive in the not-too-distant future?

A few days at the Shop.org conference in Las Vegas have confirmed at least two of them for me. Details in the next post.

In Part I they explain ROI with the payoff quote "When an advertiser tracks and monitors their ROI, they are seeing the complete picture. This allows them to make smarter decisions about their online ads and, ultimately, make their business more profitable."

Interestingly, ROAS is never metioned. Not shown in the tables that list the standard Adwords metrics of impressions and clicks and conversions.

The next two posts promise to tell us how to track and then use ROI. Hopefully these will also include an announcement about Google supporting ROI reporting directly within the Adwords interface.

An update of sorts is being presented today at a conference in San Francisco in the form of a paper entitled "The Manifesto on Monday Morning: How to put the wisdom of Cluetrain into action when you get to your office.” It will be interesting and probably important to really understand the ideas presented here. Read more about it on ZD - and if you haven't read the book yet - get it!

Consider an article in The Hollywood Reporter about Viacom MTV’s decision to abandon the mega-site and create dedicated sites for shows like The Daily Show, The Sarah Silverman Program, and SouthPark. As reported:

The sites join a growing list of targeted Web sites that the Viacom property has launched in the past year in conjunction with its TV shows. Other sites include Comedy Central's Indecision2008.com, MTV's YoMomma.TV and VH1's BestWeekEver.TV.

The sites are the latest in MTVN's strategy in the online arena, which establishes individual destinations for shows and related subject matters instead of a centralized site. The new portals will bring the worldwide total of MTVN Web sites to more than 300 destinations by year's end.

Traffic across MTVN's properties has increased from 76 million unique visitors in January to 91 million visitors in July, according to comScore Media Metrix.

It makes a lot of sense. Fans of The Daily Show really don’t care that it’s part of ComedyCentral or is part of MTV and owned by Viacom. And a dedicated site almost certainly gets more resources, more content, and earns dramatically better organic search results.

Most ecommerce sites offer a range of goods from different manufacturers across a number of categories aimed at different user groups or usage purposes. A large sporting goods retailer like Dick’s sells tons of Nike, aims at Golf and Soccer and Running, and services weekend, hardcore, and armchair athletes. Targeted sites, which have been sparingly used under the name ‘microsites’ for a long time, would give Dick’s the same advantages as MTV.

A look at the Dick’s site reveals a highly attractive and professional site, with advanced features like guided navigation and user ratings. But managing such a huge range of goods has resulted in very little depth beyond core product information – the golf section for example is 100% ‘picture-price-paragraph’ without any supporting information beyond lovely glamour photography. A quick check reveals that the site doesn’t gain organic rankings on the first page for any of the main phrases of that section – golf bags, golf clubs, golf balls, etc.

Who does rank for Golf Balls? The answer is golfballs.com, golfballs101.com, golfsmith.com, onlygolfballs.com, etc. For Golf Clubs the answers are similar. How many millions of dollars is Golf worth to Dick’s? How many more if they ranked well. (They also don’t seem to be competitive in related PPC, fyi).

What would it cost to develop 50-100 pages of content and more informative and interactive features for the golf section, or better yet the new golf site? Relatively little. From my experience the technical issues of their CMS systems, commerce platforms, and in-house IT depts. are far larger barriors. Whatever these struggles are, they’re going to need to get resolved.

This isn’t picking on Dick’s, I chose them as an example of broad inventory, but all of the above could be said about Wal-Mart, Musician’s Friend, Advance Auto Parts, and many others. Of course, windshieldwipers.com, harmonicasandstuff.com, http://shitbegone.com, have already demonstrated the benefits of targeted sites, gaining top 3 rankings ahead of these merchants.

As the revenue potential, competitive realities, and ‘glass ceiling’ in paid search become clearer to the major (and smart minor) ecommerce companies I believe we’ll see a lot more MTV Retailing, with companies running a network of focused sites instead of (or in addition to) one central mega-store.

If the goal is maximizing revenue or profit, maybe not. The assumed correlation just doesn’t exist. Consider ‘keyword A’ with a 417% ROAS and ‘keyword B’ with a 375% ROAS – which one makes you the most money?

The answer lies in the interaction of the average cost-per-click and the conversion rate. If ‘keyword A’ has a $0.15 cpc and a 2.50% conversion rate, and ‘keyword B’ enjoys a 3.75% conversion rate with a $0.25 cpc, then ‘B’ produces a whopping 50% higher revenues and 45% more gross profit at the lower ROAS. (See the table above for a full breakdown.)

This example shows that for every keyword where you review the return-on-ad-spend to make future bidding and budget decisions, you really need to factor in cost-per-click and conversion rate. Add to that the importance of margin and the fact that keyword selection and max-bid are only 2 out of about a dozen factors you can manipulate to impact ROAS (and conversion rate) and we arrive back at the original premise - ROAS needs to die.

It would be great if paid search was a simple little game where the skills you’ve picked up in other endeavors prepared you to easily and consistently win. Once upon a time it might have been.

(Thanks to Bruce Ernst for the math and other guidance.)

Is a 500% return-on-ad-spend good? Is a 159% ROAS bad? As discussed previously, that depends upon the net profit margin of the goods/services sold.

If ROAS is below a certain threshold for a particular keyword, should you delete or pause it? If ROAS is above a threshold is everything peachy-keen? The answer to both is probably ‘no’ at least until the current bid, text-ad, landing page, and offer pricing are considered, modified or tested.

It’s easy to fall into the trap of thinking that individual keywords are either ‘good or bad’. But the truth is that in paid search you’re measuring a system – the keyword, search query, text-ad, position, bid, landing page, conversion funnel, checkout process, product selection, and pricing offers and terms. While it’s obviously not possible to infinitely test every possibility for each of these variables, keeping them all constant and rendering judgment on the keyword clearly isn’t fair or reasonable either.

From a workflow perspective neither the search networks nor web analytics packages are of any help in measuring return (on ad spend or investment) as you perform a more complex series of tests of the other variables that impact the success of a keyword. The fact that all currently available tools fail to support are more complete and realistic view of the search environment clearly has a lot to do with the overly simplistic way most campaigns are still managed and reported on and evaluated.

Take one simple variable, text-ad creatives. Wouldn’t it be great if the revenue or ROAS graph for a keyword marked the points in time where different creative tests where run and showed the impact of those tests (v1 vs v2 vs V3)? Wouldn’t that be better than reviewing results and toggling to the text-ad report and then continually switching date ranges to check when ads were changed and how results varied? Or setting different tracking codes and comparing the tests to each other without being able to directly graph their progress?

ROAS is just one example of the conspiracy of false simplicity in the paid search world today. It’s helping the engines make a lot of money, and costing advertisers a bundle.

Web analytics packages, on the other hand, identified paid search traffic and associate the engine and the keyword with the revenue. But they didn’t have cost-per-keyword data. So for some time we were left to eyeball (or painfully match up in spreadsheets) the interplay between cost and revenue.

Several years ago the two began to meet. Google and Yahoo added ‘conversion tracking’, and added API’s that enabled cost data to be pushed into web analytics packages. Suddenly, if you could properly tag your site (often no simple feat) and get the API’s to work properly (often an intermittent miracle) it became possible to see how many orders and how much revenue each $dollar of paid search (or each explicit keyword, adgroup, etc.) was generated. We entered the era of ROAS.

Compared with having no meaningful relationship between cost and revenues, this was a great advance. But as mentioned in the first post in this set, return-on-ad-spend (ROAS) is a very limited and superficial way to measure results and success.

The problem is that ROAS ignores the cost of goods or services (plus many other fixed marketing costs) and gives the impression that every dollar returned above those spent for the advertising is a positive result. A 400% ROAS, for example, sounds terrific.

But if your margins are 25%, to take one simple example, you need a 400% ROAS just to break even. The chart below gives further examples of the ROAS required to hit certain ROI depending on your average margin.

Most businesses don’t have consistent margins across their product lines or service offerings, so the simplicity of translating ROAS into ROI in your head isn’t practical. And with promotions impacting online pricing - coupons, discounts, and special offers – actual margin calculations can vary sale by sale. To further complicate things, ROAS is reported on a keyword basis, but revenue is often generated from a basket of products that themselves have different margins.

The deeper you look, the less relevant and less useful ROAS becomes.

Why? Because the fine folks who make it so easy to buy and pay simply do not share the information you need (and I’d argue deserve) in order to understand what you bought. And to a lesser extent because the after-market analytics packages take what they’re given and pass it on to you without adding any value beyond rich formatting.

What about ROAS you ask? Ah yes. Return On Ad Spend. The one aspect of your results that is easy to calculate and even supported by the search networks. ROAS measures whether you are ‘making’ more money than you are spending. It’s fine as far as it goes, providing an initial indication of the health of your overall program and perhaps individual campaigns.

But ROAS has a number of shortcomings and even flaws, and as a metric should really be killed once we finally get Page Views into the ground.

What’s wrong with ROAS? Here’s a partial list:

• As a measure of gross revenue it ignores the tiny little reality of COGS. In other words, you can have a large positive ROAS and still be losing money on every sale. A metric only an ad network could love.
• As provided it only tells you how a blended set of search terms, positions, text ads and landing pages are performing and gives no visibility or account for the prior or subsequent actions of site visitors. As a result, it’s impossible to have an intelligent surgical reaction, and very likely to drive actions that produce quite unintended consequences.
• With its basis in the advertising spend, the easiest way to drive up ROAS is to cut certain spending. Mathematically that often doesn’t yield the highest revenue or profit. It’s like driving a car and optimizing for miles-per-gallon without regard for your destination.

In the next three posts I’ll take a deeper look at each of these flaws and talk about things you can do to overcome them.

Cool.

Hey Omniture, where's mine?

As social networks and our online identities centralize to manage our individual participation in all of this, a terribly interesting side effect is beginning. As pointed out by The Daily Networker, suddenly our business life can run smack into our personal lives. The comments, photos, links, videos, and other artifacts you’d comfortably share with your ‘real friends’ can be quite uncomfortable or even inappropriate with your ‘professional acquaintances’. Yet FaceBook or MySpace don’t have multi-tier tagging and permission systems that keep these things apart.

The risk/reality of this has obviously been evolving, as ‘googling’ anyone can turn up aspects of their personal life. And of course we’ve had all those teachers who got hassled because they had lives before they became teachers and in some cases imagined they could have private lives after.

But is it a good thing when you connect via a social network with someone with whom you have a perfectly solid professional relationship and suddenly (and without request) come face-to-face with the fact that they support Obama, paint their faces with the No. 17 for Sunday Nascar races, love death-metal, and seem to be really into astrology?

I have no idea what result will come from this aspect of the online conversation, but it will be interesting to watch as these systems cross from the techie corners of society into much more widespread use.

In other words, Motorola can now mandate that their bluetooth headsets sell for $79.95 rather than the $24 at which I've been able to find them online. Palm can now dictate the the Treo 755 never be sold for less than $499. In other words, the rest of the world now gets to enjoy the pricing control previously reserved for Steve Jobs and iPods :-)

As with all other heinous reversions of rights and practices, this one is cloaked in twisted logic that claims it's for the good of society: By allowing companies to dictate not only the price at which they sell good at wholesale, but also the price at which resellers must sell at retail, we all benefit because it "makes it easier for a new producer by assuring retailers that they will be able to recoup their investments in helping to market the product."

In other words, no companies have been able to successfully create, launch, or retail products for the last 100 years because this horrible tradition of discounting has made business just plain unprofitable. Finally this ruling will allow business to return to America. (Never mind that all known facts are to the contrary - this is a justification for policy change, it need not be reasonable, rational, or factual.)

So stock up on whatever you crave. Prices are about to go up.

But who really understands this somewhat obscure art and science? Do the marketing VPs or online marketing directors who decide to allocate budgets and resources?

Apparently not. How else can you explain the fact that paid search gets 8X the budget allocation of organic search, and yet generates only about one quarter of the clicks?

And within those organizations that do make the decision to invest in organic optimization, do the insiders that need to support the execution of an SEO initiative know how it works and why it’s important?

Certainly not in my experience or that of the other professional SEO’s I recently talked to about this topic. In fact, just about everyone you’d need to assist in search optimization is pretty likely to work against it. Consider the following profiles - caricatures to be sure - but not far off the mark in my experience.

• Marketing Manager – Generally supports SEO or the project wouldn’t get started, but usually knows next-to-nothing about what it really entails in terms of the breadth and depth of technical, content, and design changes to the website that will be requested or required. When the magnitude of these change requests appear, they often focus on negotiating down to what’s feasible given the internal politics instead of managing the politics to get the necessary changes done. In the end, they get a sub-optimal result – hoping they can somehow get 80% of the benefit from the 20% of the changes that made it through. Of course they won’t.

• Web Developers– Doesn’t know much (or anything) about search optimization, doesn’t really care, and sees all the SEO requests as changes to what they’re planning or the ways they’re used to building site/pages. Frequently have an easy-going ‘I’ll do whatever they want me to’ attitude going in but as development moves along somehow the SEO requests often get shaved in order to ‘make the schedule’. In other words, they were all seen as ‘nice to have’ requests and not ‘must have’ requests.

• Product Managers / Merchandising Managers – This one is the most surprising. You would expect these folks to be naturally included to present clear and complete information about their products. They’ve been limited picture-price-paragraph in catalogs and brochures for years that suddenly in a medium with free incremental space you’d expect them to go wild – extolling the virtues of their products at length. Doesn’t usually happen. More commonly see the need for deep rich content and extra work (we don’t have long descriptions or up-to-date feature lists on all these products!). Seem to think prospects will buy their goods or services just because they’re selling them. Forget SEO and better rankings, shouldn’t they want to deliver more information in pursuit of higher conversion rates and more revenue?

• Graphic designers / Web designers – While it’s almost possible to understand how web developers have made it to 2007 without any idea about the methods of SEO, how did so many people who design websites for a living make it this far without becoming at least minimally aware of this stuff? The battle here of course comes down to form over function, with ‘text’ being a four-letter word for ‘aesthetically unappealing’ and anti-aliased .gif files somehow frequently ending up the lynchpin of the designs.

• CEOs / Senior Managers – These folks shouldn’t have to know about SEO, because those functionally closer to the projects should have it covered. But since they don’t most are left to notice (or be told) that their sites don’t show up on the first page in Google for some keyword they decide is critical (like their core product name or category) and then they spring into action. Calling in the Marketing Manager (described above) they then hear a long and confusing list of reasons and finger-points as to why the site/page doesn’t rank: the developer had technical limitations due to the platform and the design that graphics and marketing wanted doesn’t index well for some reason, and the product managers are working on generating more copy, and it’s basically an intractable situation but next year they plan a site redesign and they’ll hopefully get it right then. They’re left believing that SEO is an intractable problem and with the view that paid search is at least ‘actionable and manageable’.

Herein lies the real problem with SEO.

While the potential benefits are easy to articulate (who doesn’t want high volumes of free traffic from the search engines) as a marketing discipline it has something of a branding and positioning problem and even when projects are approved and begun the real-world implementation very frequently turns into a protracted and very difficult process.

A lot of the reason is the perspectives and motivations of the players, as described above. But there’s another massive problem too.

More about that in the next post.

Never. Gonna. Change.

The question is whether or not the algorithms (and their human assistants) are so darn good and in fact measuring the actual level of satisfaction that your pages and content bring to real users so well that by optimizing your site for the users you have in fact done everything you could possibly do to increase your chances of the search engines ranking you highly for all of the search phrases relevant to your content.

That is the idea that Mike Grehan, and then responsively Bryan Eisenberg are getting at. Make the people happy and the engines will take care of themselves. It’s also the ‘Don’t Worry Make Them Happy’ song the Google Webmaster Guidelines have been singing for years.

Trouble is, it just isn’t true. The search engines don’t rank based on customer satisfaction. They develop indicators and proxies that they hope/believe should highly correlate to customer satisfaction, but keyword placement, word context, link structures and the dozens or hundreds of other variables they track don’t always hit the mark. The current results prove that.

So until Google starts surveying visitor satisfaction and using that data to rank sites in their engine (not a bad idea, but one that brings its own issues), it’s not yet time to cross SEO off your to-do list.

NOTE: I want to make clear that I completely agree with both Mike and Bryan on the importance of working hard to improve the core quality and satisfaction delivery of websites. I’d even strongly agree that it should be the most important thing you focus on. But we aren’t yet at the time or place where it’s the only thing you need to do.

The New York Times and Jason Calacanis have found the Achilles’ heel and with some justice it’s deep in the heart. The Algorithm.

As fast and as smart as it is, it can and is gamed on a very consistent basis. Although the larger miracle of general quality and accuracy has created a brand image that overcome reality time and time again, and despite the irony that there has probably been more progress made to improve the results in the toughest spots in the past twelve months than in the previous five years, it still remains true that the more likely there is money attached to your search, or significant diversity surrounding its concept, the higher the probability that your results will NOT be the 10 most relevant in the world.

The fact that humans can do a better job isn’t really even an argument. The issue is speed and scale. The brilliance of what Jason is doing at Mahalo is the idea of taking on the top XXX thousand most popular searches and letting the algo’s have the rest. It’s still a bear of a task, in terms of coordinating and avoiding conflicts of interest (real or imagined), but the rise and domination of Wikipedia clearly says it’s not impossible.

A lot of the response from Matt Cutts sounds very defensive. ‘People turn on our computers, and people wrote and loaded the software…’ but in the end he seems genuinely open to having people edit results. That of course would be the smart thing to do, both functionally and competitively. Google could certainly arrange to have the top 10K results human edited in very short order. They don’t even have to make a big switch, just offer a tab at the top, or preference or alt search button (‘algo search’ vs ‘editor says’). Let users opt-in to these results when available, or switch to them when the machine is being out-witted by 100K spammers just out for their commissions.

It’s amazing how competition drives better results. And how a little press (mainstream or blog-o-based) magnifies the significance and pressure generated by anything. I have no doubt that the ‘human-assisted’ arguments inside of Google will heat up and make more headway tomorrow than they did last week. I’m also sure that Mahalo and lots of other competitors will be equally spurred on to leverage their progress into even greater success. And that’s good for all of us.