If you work in digital marketing in some capacity (if you're reading this, it's likely you do), you probably devote little to no time thinking about co-op advertising. You may only have the vaguest idea of what co-op advertising actually is, or how it works.
While you're ignoring co-op advertising, the manufacturers who run co-op programs are equally busy ignoring you. They're too busy pumping an estimated $50 to $520 billion into their co-op programs annually. Online advertising may be growing by leaps and bounds, but it's getting significantly less than 1 percent of this enormous sector of the market (by comparison, GroupM estimates total U.S. advertising spend this year will be $153 billion).
While the above figures indicate valuing the co-op advertising market is difficult, clearly it represents a huge reservoir of potential digital spend. So how come digital is getting so little of it? This is a topic I've been discussing with the IAB for some time. Recently, they asked me to look into the issue more deeply. My findings are available on the IAB website. Here's an overview of what co-op advertising is, why digital is missing from the equation, and what steps the industry might take to rectify a clear imbalance.
Co-op advertising defined
Co-op advertising is an agreement between a manufacturer and a retailer to share advertising costs. Typically, manufacturers underwrite from 30 to 50 percent of advertising costs, though contributions from 75 to 100 percent aren't uncommon. Different manufacturers have different policies. They may provide creative, furnish the ad, or underwrite only media costs.
There are numerous beneficiaries in this ecosystem. Manufacturers get increased exposure at a lower cost. Retailers benefit from brand name product associations, while smaller retailers, who might not otherwise be able to afford to advertise, can advertise, thanks to co-op dollars. Agencies and media companies can increase their billings, and media companies fill ad inventory.
The missed digital opportunity
Of over 1,000 co-op programs listed in the Local Search Association's database (representing over 1,700 brands), only 223 permit limited forms of digital advertising, generally search and display. Several explicitly forbid co-op dollars from flowing into digital channels, despite hockey-stick growth in local search, advertising, targeting, daily deal and coupon sites, etc. (and local is, of course, the bread and butter of retailer-focused co-op programs).
A recent study by Borrell Associates estimates the online co-op market currently makes $1.7 billion available, with $450 million of that left on the table "for lack of participation." Couple this with the majority of co-op programs that limit or preclude allocating spend to digital channels, and the potential value of this market could very quickly exceed $5 to $10 billion per year. This is roughly double 2011's online retail spend of $7.1 billion (IAB/PwC).
Clearly, it's time to take stock of the obstacles that prevent this revenue from flowing online. We identified three primary stumbling blocks:
- Complexity and multiplicity of digital channels: On both the manufacturer and merchant sides, the sheer amount of knowledge required to advertise in digital channels is a formidable barrier.
- Lack of infrastructure: On the manufacturer side, co-op advertising sometimes falls under the auspices of marketing, but more frequently is a function of either the sales or the finance department -- areas inherently unlikely to be versed in digital marketing strategies or tactics.
- Lack of guidelines and requirements: Co-op advertising program rules around issues such as logo usage, mentioning competitive products, and general branding requirements are established in traditional channels. Digital provides a range of new challenges (e.g. manufacturer rules around bidding on brand or trademarked terms in search).
With billions of dollars on the table, its time the industry met these challenges head on. Our recommendations include strategically and tactically addressing a multipronged approach.
- Awareness: Just as manufacturers and retailers are unaware of the potential benefits of online advertising, not to mention the actual tactics and techniques for executing digital campaigns, so too is the digital ecosystem largely blind to the potential and the workings of co-op advertising.
- Education: Channels, metrics, targeting, and the like are close to a foreign language for many retail executives, particularly the "mom 'n' pop" retailer.
- Standards and best practices: Online co-op advertising does exist, particularly in the automotive and durable goods sectors. A closer examination of how successful programs in these verticals function can lead to case studies and ultimately help create templates on which broader co-op programs in different industries can be based.
- Technology: Development of platforms that enable workflow automation would go far to make the co-op advertising process easier for manufacturers and the often over-burdened merchants who run co-op campaigns. Also useful would be a database of co-op programs and digital asset management for logos, creative executions, and brand elements, which are offered by a few service providers today.
- Publisher initiatives: Assist in helping to re-establish the co-op ad manager role, this time with a view toward online display advertising.
- Cooperation with co-op ad management companies: Many legacy co-op program management companies have expanded into digital, yet are unconnected with mainstream publishers and industry trade groups.
The IAB, together with the Local Search Association, have taken an important first step in creating awareness of the value and the lack of co-op advertising in digital. The next step is to drum up a broad swath of industry involvement. We need more trade groups (Shop.org and the OPA come to mind) beating this drum with their constituencies. Agencies, technology providers, and VCs should be brought into the discussion. Both sides need to talk, and listen, to each other.
Bringing co-op advertising online will be neither quick nor easy. But with billions of dollars at stake, you can bet it's bound to happen.
Rebecca Lieb is a research analyst covering digital advertising, marketing, and media at the Altimeter Group.
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"The word CO-OP is magnified" image via Shutterstock.
