Maybe you can have too much of a good thing. As the Internet allows advertisers to slice and dice large segments of desirable markets into thinner, more defined slices it also creates something that is much less desirable: smaller profits.

How is that you say? How is it possible to make less on my advertising spend when I am advertising directly to the group that most needs or wants my products? Well, it’s simple supply and demand. While you are targeting a much more defined market you are not going to be alone in that quest to advertiser to just the people that will buy. Remember those pesky competitors? They want those people too because their claim is that they are better than you. Now you are going to find a price war that drives up costs for advertising and makes customer acquisition costs rise which in turn hurt the bottom line. So maybe there is too much of a good thing after all.

MediaPost tells about a study performed by the MIT School of Management that has looked at this in detail

Professor Alessandro Bonatti, working with Yale University economics professor Dirk Bergemann on this research, says “… newspapers have a very limited ability to target audiences… specialized magazines can do better… Google has a very good ability to target who’s browsing each page… (though) online advertising has the potential to drive out traditional advertising, it does not necessarily follow that online advertisers will make more money… ”

Bonatti continues, “…as technology keeps improving, more and more web sites can sell very narrow products to very specialized audiences… with lots of people targeting the same audience the profits to be made through specialized advertising become more and more spread out… instead of competing for one large pool… you will have price war in each targeted segment as the slice gets more and more narrow.”

Bonatti concludes that, “… the better the technology, the lower the profits for advertisers… “

Not the news that advertisers want to hear but it sure is music to the ears of the niche ad networks that attract these more narrowly defined groups. Advertising price war? We’re in! Woo-hoo!

Different verticals are responding more rapidly and it also is dependent on just how far CPM’s fell during this downturn / recession / economic morass. Real estate is seeing an increase in CPM’s jumping 17% from Q2 to Q3 of last year while foodies are driving that category up almost 91% in the same period.

Here is a chart from Adify Vertical Gauge for you to gloss over and wonder what it really means.

So be careful what you wish for advertisers. Sure it’s great to advertise as close to the buyer as you can but you’re not the only one with that strategy. Let’s hope you are the one with the deeper pockets at least.