Back in 2008 the world experienced the impact of the subprime mortgage crisis. Greed, combined with a dose of stupidity put the global economy into a tailspin. The question I have been asking myself is whether the online advertising industry is heading for its own subprime shakeout.

The global financial crisis was caused by blending toxic loans that would never be paid back with good loans that would. The thought of big commissions spurred Wall Street forward to meddle with the ratio of good performing to bad performing loans so they were weighted on the wrong side of the ledger.

Ratings agencies such as Moody’s and Standard and Poors would look at these loan blends and put a rating on them that represented the riskiness of the blended loan portfolio. The problem is the agencies were paid by the banks that were trying to sell them…..so guess what, all these toxic loan portfolios received the highest investment rating.

I know that I’ve over simplified the whole financial crisis but what happened next was incredibly predictable and now a part of history. People lost their jobs as a credit squeeze hit the financial markets and central bankers wondered how they were blindsided.

Let’s compare this to the online advertising industry.

Traffic can be bought at varying degrees of quality and blended together so that it’s just acceptable enough for advertisers to buy. In fact, the name of the game for many traffic sellers is to get an advertiser hooked on the “heroin” and then dilute the traffic quality with “talcum powder”. This way the sellers can maximise their returns.

In a number of past articles, I’ve spoken about the fact that traffic quality is entirely dependent upon the advertiser. If the traffic works for them then it’s high quality, otherwise it’s low. This has always seemed to make sense to me until I began digging a little further…..and now I think I could have been wrong...

Over the last couple of years ParkLogic has been experimenting with how to best define traffic quality. We’ve tried quite a number of third party services that are used by advertisers and what we’ve found is there seems to be a lot of smoke and mirrors bundled with some hefty fees.

The problem is that many advertisers rely upon these services to determine whether traffic they are purchasing is of a high quality or not. It’s the very sophisticated e-commerce website that attributes a traffic source id to a click and then tracks it right through to a purchase.

For those advertisers that wave the flag of Google Analytics then think again. If you think about it, Google is essentially in conflict with itself by wanting search traffic to provide awesome results so that the advertiser will purchase more traffic.

Getting to a definition of traffic quality is one of those elusive things that’s quite often difficult to pin down. It’s almost like discerning the difference between art and pornography…..you know the difference when you see it.

Advertisers pay huge sums of money for quality traffic and shy away from garbage. The question needs to be asked, “What’s quality?”

Some have answered, that’s easy! It’s real human traffic. I agree that we need to do as much as we can to remove all the automated bots but just having “human” traffic doesn’t necessarily define it from an advertiser’s perspective.

For example, let’s imagine I directed real humans from China to an USA based company’s website. My guess is the US company wouldn’t be too happy with paying for all the Chinese traffic…..why? The traffic didn’t convert for them.

Now we are defining quality as traffic that converts. Strangely, this definition means the risk associated with conversion is pushed back to the traffic provider and not the websiteowner. From our example above, if I’m now only sending US traffic to the US based company then they should be happy…..well, maybe.

Many people talk about having quality domain traffic but what does “quality” actually mean? In this article, I’m going to attempt to unpack "quality” and from who's perspective.

Domain owners often confuse quality as being a measurement of the level of real human versus bot traffic. On the other hand, advertisers define quality as traffic that converts for them. Who is right and are these sensible definitions for quality?

Recognised versus unrecognised traffic is the ratio of the views over the URLs for a domain name. Remember views are what the parking companies report while URLs are the unfiltered raw traffic for a domain. This is also the measurement of how much traffic is effectively dropped by a parking company as they deem it either a bot or unacceptable for one or another reason. The assumption is the greater the ratio of views to URLs the better the traffic quality.

Let’s imagine I have a views to URLs ratio of one (ie. A perfect score). There are a number of other filters the traffic flows through before an advertiser deems a traffic source as containing high quality. Let’s break these steps down.

A user clicks on an advertising link.

A domain with a high Click Through Rate (CTR) suggests there is an appropriate match between the traffic (ie. Users) and what is being displayed. The user is enticed to click on an advertisement to find out more information.

If the user was interested in games and the page had mortgage advertisements, then there is a mismatch and the CTR would reflect a lower number.

This sounds pretty obvious until we consider that a couple of years ago Google changed their advertising from being context sensitive to psychographically targeting the end user. In other words, previously if a user went to beds.com they would see bed related advertisements. This has now changed so that if I go to beds.com, it may also display hotels for Bali because Google knows I’ve been searching for a good vacation spot.

This also means we can't judge the content of a parked page simply by going to it ourselves....which is a little disappointing because it was so easy in the past to match the traffic to the advertisers.

Advertiser’s Website Convinces User to Begin Buying Process

After clicking on the advertisement, the user is faced with the sales pitch to entice them to buy the product. This is completely out of the hands of the domain owner that sent the traffic but is an important part of the overall quality process from the perspective of the advertiser. The goal is to have the user begin the purchasing process by adding the item to their shopping cart.

User Pays for the Shopping Cart

The advertiser only earns money when the user puts their hand in their pocket and actually pays for the shopping cart. Without this singular event no advertiser would ever buy any advertising. This is one of the reasons why advertisers regard converting traffic as quality traffic.

If we were to take these steps and create a mathematical formula, then it would look something like this:

URLs X Parking Filter = Views

Views x CTR X Click on Specific advertisement = Traffic to advertiser website

Traffic to advertiser X % Who Complete Purchase action = Shopping cart filled

Shopping cart filled X % of people that pay = sale

This means that a sale is a fraction of the total URLs that first went to a domain name. An advertiser is often blissfully unaware of many of the intermediate steps and focuses their attention on their total sales divided by how much they paid in advertising. This provides them the gross return on their investment. This is a simplistic view but it will do for illustrative purposes.

The problem with this whole process is quality is being defined in terms of sales. What happens if the advertisers pitch attracts the wrong type of potential buyer? What if the sales pitch on the advertiser’s website is really poor? What if the advertiser’s website just looks horrible and has a clunky shopping cart system?

There are so many factors that go into the sales event that are out of the control of the domain owner so why should the domain owner suffer? Ultimately it’s because the advertiser is the one that pays the cash.

So what can a domain owner influence? The only thing they can do is potentially increase the CTR by better matching the contents of a page to the advertiser…..but as we discussed earlier this has largely (not completely) been circumvented by Google’s psychographic targeting systems.

What some domain owners have done in the past is pick up their traffic and move it one hundred percent to a direct advertiser that will hopefully value it. For example, this means taking your travel traffic and pointing it at a travel website.

This all makes some sense until you look at things from the advertisers point of view. Previously, the parked page and clicking process effectively acted as a filter for those people who were interested in the products/services being advertised. Why would you click on an advertisement unless you at least mildly interested? By pointing all the domain traffic this filter is no longer in place.

If the advertiser was paying Google $2 per lead previously then they will be forced to place a discount on this to accommodate the disinterested traffic. This is very likely to trend to the CTR for the domain. Which is another way of saying, “I don’t want to pay for the people that didn’t want to click in the first place.”

If the CTR was originally 20% then the advertiser will pay 20% x $2 = $0.40.  This may be greater than what Google less the parking company commission was paying the domain owner for the traffic. So it may still be worthwhile for the domain owner.

Advertisers may pay more than this figure because they are after volume. Essentially it’s paying a premium to the domain owner because the domain owner can provide a large amount of business. This is a potentially a great result for both parties.

The problem most domain owners have is they don’t control enough traffic in any single market vertical to make it worthwhile to establish these secondary relationships. The advantage with working with a traffic aggregator is they can pool the total traffic from multiple domain owners and send it to individual advertisers. It’s the economies of scale at work.

This all brings us back to the definition of quality. It’s clear there are different definitions depending upon whether you are a domainer or an advertiser. Ultimately for true direct navigation there is no such thing as quality but only results.

The single biggest challenge that domain owners experience is we have very little insight into what domain traffic converts and what doesn’t. If this was provided in our daily statistics, then we could truly value our traffic from an advertiser’s perspective. Maybe we'll get this one day but I wouldn't hold my breath!