State of Digital Marketing Report

It’s Prime Day for Advertisers

Advertising costs (CPM) trend

The cost of advertising, as measured by average CPM, was down 49% on average in the second quarter of 2023 compared to the year before. Contrary to the previous 2 years, where the average CPM increased from Q1 to Q2, Q2 2023 actually saw a lower average CPM compared to Q1, pushing the year-over-year CPM change from -33% in Q1 to -49% in Q2.

Website traffic trend

Website visitors had a moderate gain of 8% in the Q2 2023 compared to the last year, but it was lower than Q2 2021. In general, website traffic level was relatively stable in the last 3 years.

Conversion trend

Website conversions tell a different story. They were up 13% in Q2 2023 compared to the year before, extending the gain from Q1. However, there was a significant variation among industries. Companies in the Career and Education sectors had their conversion number more than double from a year ago. Sectors related to entertainment and hobbies also had a sizable gain. On the other hand, companies in the Automotive and Real Estate sectors had a steep decline. Note: the definition of conversion varies by customer and doesn’t always refer to purchases.

The difference in the year-over-year conversion change reflects the consumer spending behavior in Q2. While consumers were holding back on big ticket items due to the economic uncertainty, they’re willing to spend on products or services that enrich their day-to-day lives or improve their perspectives in the job market.

CPM Trend Deep Dive — the Decoupling of Consumer Sentiment and Consumer Spend in 2023

What caused CPM to drop nearly 50% year-over-year?

Advertising CPM, similar to the cost of any goods, is determined by supply and demand. In the world of digital advertising, publishers serve as the suppliers; the websites or mobile apps that host and deliver ads to advertisers’ target audiences.

The selling and buying of digital ads is typically conducted in an auction format which can be handled programmatically by two types of platforms - the Supply Side Platform (a.k.a. SSP, representing the publishers) and the Demand Side Platform (a.k.a. DSP, representing the advertisers).

Since the amount of advertising space offered by the publishers typically doesn't fluctuate, changes in CPM are mostly driven by the demand for ads. That means the unusually low CPM in Q2 2023 is the result of unusually low demand from advertisers.

Why was advertising demand so low in Q2, and will it stay that way for the foreseeable future? Let’s dive in.

Is the economy to blame?

There’s no doubt the economy has been facing significant headwinds in 2023, and the possibility of a recession in the U.S. is still high. However, by many measures, the economy is actually improving. In fact, Goldman Sachs recently lowered its projection of the probability of a U.S. economic recession in the next 12 months from 25% to 20%.

As of July, major U.S. economic indicators show an improving economy in 2023:

Change of consumer and advertiser behavior

While the current economic climate doesn’t seem to support such a steep year-over-year decline in CPM, we believe 2023 consumer behaviors are indeed different from the previous years, which is affecting advertisers’ spending decisions.

According to Bank of America’s July Consumer Checkpoint report, which analyzes U.S. consumers’ spending patterns using its proprietary data, consumer spending decreased in Q2 2023 compared to a year ago. While the year-over-year growth of consumer spending has been in decline, this was the first quarter, since 2021, that dropped to the negative zone. The consumer spending decrease was certainly felt by businesses, causing marketers and advertisers to take a more conservative approach to advertising.

When comparing trends of the median CPM from our data to the U.S. Consumer Sentiment Index, we also noticed a seemingly contradictory pattern in 2023: while CPM was decreasing (which echoed the decrease in consumer spending), consumer sentiment was doing the opposite.

Which direction will CPM go for the rest of 2023?

Historically, CPM starts to rise in Q3 and peaks in Q4 around the holiday season every year. It’s not a question if the CPM will increase later this year—it certainly will. The real question is: by how much?

If the economy and consumer sentiment continue to improve along this trend, consumer spending will likely bounce back in the second half of the year. This increase in consumer spending could then drive the demand for advertising, which could result in a heightened CPM. Add in the force of the holiday shopping season, and it's possible we may see a rapid increase of CPM around Q4 this year.

In fact, signs of the advertising market rebound are already here. In its latest financial filing, Meta reported strong ad revenue growth in Q2 and a positive guidance for Q3. According to AXIOS, numerous advertising analysts also expressed optimism of the ad market in the second half of the year.

How Marketers Can Prepare for the 2023 Holiday Season

As consumers continue the trend of starting their holiday shopping earlier and earlier, we encourage marketers to capitalize on low CPM now to reach out to their high-value consumers, learn as much about their preferences and shopping behavior as possible, and engage with them across the digital channels to build strong brand awareness early.

Then, as Q4 approaches, marketers will need to shift their focus to conversion-driving campaigns, such as retargeting and abandoned cart recovery, as consumer spending and advertising costs increase.

If you’re interested in building a comprehensive holiday marketing plan, check out our 2023 holiday marketing guide. The holiday shopping season starts as early as September, which means you need to determine budgets and deploy strategies now. Our guide has a month-by-month breakdown that includes where to put your budget to maximize results and win the holiday shopping season.

Key Takeaways

• CPM dropped nearly 50% in Q2 from a year ago, while site traffic and conversions are up.
• Economy and consumer sentiment were improving, but consumer spending was down. Low consumer spending affected marketers' decisions and ultimately drove down CPM.
• Consumer spending will bounce back as the economy continues to improve. Adding in the force of the holiday shopping season, it’s possible we may see a rapid increase of CPM in Q4 this year.
• Marketers should capitalize on the low CPM right now to build brand awareness among their haigh-value customers before the holiday shopping season when CPM rises to the highest level of the year.
• As the holiday season approaches and consumer spending increases, marketers need to turn their focus to conversion-driving campaigns, such as retargeting and abandoned cart recovery to maximize Return on Ad Spend (ROAS).