Why Marketing Automation Means More Than Faster, Better, Cheaper

Anyone who does business with Madison Avenue knows there's a revolution afoot. Some big advertising agency holding companies are spending billions buying up tech ventures that play key roles in the burgeoning marketing category of ad-tech. Large technology companies are aggressively acquiring elements to assemble what they call a "marketing stack" or "marketing cloud." And Internet giants are building, buying, and partnering to establish market dominance as the world's most powerful advertising services companies, based on privileged access to some of the highest-quality first-party customer data of any advertising platform in the world.

For anyone who believes that the past few years have been business as usual for marketers, a rude awakening awaits. But for those who have anxiously anticipated the moment when CRM would enter mainstream marketing, it's time to get excited. No longer are one-to-one communications with consumers limited to direct response communications. Now, individually targeted messaging is becoming a fact of life—or at least an option—for marketers in the mainstream.

Indeed, marketers finally have an intelligent response to that conundrum posed by 19th-century department store magnate John Wanamaker, who lamented, "Half the money I spend on advertising is wasted; the trouble is I don't know which half." While we haven't exorcised Wanamaker's ghost entirely, we can challenge his dictum when it comes to digitally addressable media.

Only recently has digital media become a significant part of most marketing programs. Of the $550 billion projected marketing investments in 2015, roughly 25 percent will be for digital media. Digital media provides an opportunity for marketers to track advertising investments against outcomes with unprecedented rigor.

Of course, increasing precision in measurement thanks to digital technology is nothing new. What's new is the rise of marketing automation. This is what Madison Avenue is abuzz about: namely, the programmatic buying and selling of advertising.

Digital advertising is increasingly bought and sold in public and private marketplaces known as advertising exchanges. In these fully electronic markets, buyers (brands and their agencies) come together with sellers (publishers and their representatives) to exchange dollars for placements across every conceivable type of digital media.

In these digital ad exchanges, something truly unprecedented is taking place. To wit, while advertisers still judge price based on a cost-per-thousand metric (CPM), their trading desk partners are buying impressions individually and algorithmically, and grossing them up into bundles of a thousand for CPM pricing purposes.

This means that advertising placed programmatically is actually being targeted in a manner consistent with one-to-one or direct marketing communications. Every time a user sends through a request for a Web page, an "ad call" goes out to various ad exchanges. The exchanges present that individual impression, along with a host of accompanying data, to provide potential bidders with a profile against which they can set a bid price. Data may include machine type, browser, location, and a rich array of profiling data based on cookies and tags placed by third-party sites on the user's browser.

This speaks volumes about the potential value of any given user to any given advertiser. This entire process that results in an ad placement—known as real-time bidding—takes, start to finish, an industry average of 65 milliseconds. That's less time than it takes to blink an eye.

Programmatic buying and selling of ad inventory today accounts for approximately 20 percent of digital ad investments. That's up from practically nothing three years ago. As its use expands within digital media, marketers will realize a level of precision unprecedented outside of direct channels. When such techniques are linked to CRM databases to further enrich and enable better real-time decision-making, all bets are off in terms of how effective—as well as efficient—marketing may become. And, of course, programmatic techniques will become commonplace across traditional media, too, as the steady march of digitalization of all media advances.

That's why we'll soon know the answer to Wanamaker's question. We'll also know something else. When advertising works, and we can prove it, most marketers won't want to spend less. They'll spend more.

Jeffrey Rayport is a faculty member in entrepreneurial management at Harvard Business School. An author, consultant, and investor, he specializes in digital media, marketing, and technology-based services.