Hype around "Hypertargeted" advertising, and what REALLY matters in click-based advertising

This article in today's Wall Street Journal discusses Myspace's "Hyper targeted" advertising system. The system studies profiles, messages, and other information of Myspace users and divides users into more than 1000 distinct "buckets" or categories. This classification can be used to target specific customer groups very effectively. Or so News Corp. (which bought Myspace for about $580m) hopes.

The article goes on to explain that "hypertargeting" has had checkered success, with some advertising campaigns having moderate success while others doing perfectly well with less "targeted" and more generic location-based (zip code) online advertising.

There was one very interesting example in the article. Quoting from the article

"The New York Health & Racquet Club spent $5,000 on a MySpace campaign that displayed 2.3 million ads to users on the site. Though the health club could have chosen to target ads at people who say in their profiles that they enjoy rock climbing, yoga or working out, it chose instead to simply target by age and ZIP codes near its facilities. The club said it was relatively happy with the campaign, which generated roughly 1,000 clicks, a response rate of just 0.04%."

-Source: WSJ

Now lets see, the New York Health & Racquet Club spent $5000 for 1000 clicks, i.e., $5 per click. If we assume that 5% of those folks who clicked on the ad actually signed up for club membership (means 50 sign-ups) then the per-membership marketing cost is $100 per customer. Not bad, considering that the average membership is $75-$100 per month. One the other hand, if only 10 people signed up, then you have a much higher price of $500 per new customer.

The key question therefore is, what is the post-click conversion rate, i.e., yield per click. Because this determines the value of the click for an advertiser (like the health club), and by extension, the price of the click that a content syndicator like Myspace can set. Ultimately it is the advertiser's landing website that needs to make customers out of users.

The Myspaces and Googles of the online world may well find it worth their while to start helping advertisers convert clicks into dollars instead of stopping at matching the exact user profile with the exact advertiser. Hypertargeting is good, but paying customers are much much better.