Restoration Hardware and the Online Advertising Value Proposition

From ZeroHedge, September 11:

A Startling Anecdote About Online Ad Spending From Restoration Hardware

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...So fast forward to last week, when during Thursday's Global Retailing Conference organized by Goldman Sachs, Restoration Hardware delightfully colorful CEO, Gary Friedman, divulged the following striking anecdote about the company's online marketing strategy, and the state of online ad spending in general (courtesy of @parsimony16). What Friedman revealed - in brief - was the following: "we've found out that 98% of our business was coming from 22 words. So, wait, we're buying 3,200 words and 98% of the business is coming from 22 words. What are the 22 words? And they said, well, it's the word Restoration Hardware and the 21 ways to spell it wrong, okay?"

Stated simply, the vast, vast majority of online ad spending is wasted, chasing clicks that simply are not there.

Here is the full must read excerpt from the conference (full link here):

I'll share a little anecdote with you on this point.

We had our marketing meeting in the company several years ago and the online marketing team was pitching to double their budget, right, and at the time, say, look, nobody in the company is doubling their budget. But tell me why you believe that's the right thing to do. And they said, well, look, our customer acquisition cost and our ad cost is the lowest in the company. And I said, well, tell me about the data, show me how. And they said, well, people who click through the words that we buy on Google, the ad cost was lowest. And I said, how do you know that they're clicking on the word and going to the website because of the word you bought versus they saw a store or they received a source book? They said, oh, we know.

I said, well, how many words do you buy? They said 3,200. 3,200 words. I said, well, what are the top words? How are they ranked, the ranking of the words? Oh, we don't have that, right. And I was getting the look at like, oh, Gary is kind of one these old brick-and-mortar guys. He just doesn't get it.

And I said, well, what are the top 10 words? And they didn’t have the information. I said, why don't we cancel the meeting and come back next week when you have the data? I'm sure that Google sales representatives who are taking you to the expensive lunches and selling you the 3,200 words have that data. So why don't we get the data and then let, review the data?

And they came back the next week and we sat in a meeting and all of a sudden, I can tell you there's a little change in the faces. They had to wear it kind of down. Everybody kind of came in. I said, so what did we find out?

And they said, well, we've found out that 98% of our business was coming from 22 words. So, wait, we're buying 3,200 words and 98% of the business is coming from 22 words. What are the 22 words? And they said, well, it's the word Restoration Hardware and the 21 ways to spell it wrong, okay?

Immediately the next day, we cancelled all the words, including our own name. By the way, we are paying for the little shaded box above our words and said, oh no, we have to hang on to that because Pottery Barn might squat on top of us. I said, excuse me? I said, if someone goes to a mall or a shopping center and they're going to Restoration Hardware and there's a Pottery Bam there, they're already squatting, okay? It doesn't mean they're going to go into their store. If somebody wanted to buy a diamond from Tiffany and just because Zale's is sitting on top of them in a shaded box doesn't mean they're going to go to Zale's and buy a diamond.

I mean, I can't believe how many companies buy their own name and they're paying Google millions of dollars a year for their own name, like maybe if this is webcast, right, a lot of people are going to go, holy crap. They're going to look at their investments. They'd go, maybe we don't need to buy our own name. Google's market cap might go down...

One wonders how long before all retailers - most of whom are notoriously strapped for revenues and profits courtesy of Amazon - and other "power users" of online advertising, do a similar back of the envelope analysis, and find that they, like RH, are getting a bang for only 2% of their buck? What will happen to online ad spending then? And what will happen to the online ad giants, if the vast majority of ad spending that justified their hundreds of bilions in market cap is exposed as "bloat"? As Friedman politely, yet sarcastically put it, "Googles market cap might go down"...