I think it’s pretty safe to say that the “traditional” advertising and loyalty ecosystems are dying a slow death and should probably be put out of their respective miseries. Mobile/connected devices powered by apps and enriched by data in real time have engulfed them. The result is a giant shifting of the power that they once had to develop and control the information flow that was supposed to influence consumer actions to those with the tools, channels and data to deliver better outcomes in real time. Those new players are the platforms that power commerce and payment. They will simply subsume what was once the domain of their incumbent advertising and loyalty brethren, divert the budgets once allocated to them, and in turn, recast those activities into more targeted value-added services that can be more tangibly measured and monetized.
The march to mobile (and connected devices) should make you a believer. The advertising community has forecast a rosy outlook for the 2014 mobile ad market as they see marketers move money into the mobile channel. At first blush, that makes sense since that’s where the eyeballs are headed. Except there’s just one problem, mobile ads are highly ineffective. Small screens and intrusive formats turn off users and they don’t click. Fifty percent of the ads that are actually clicked are clicked by accident. I’m pretty sure each of you can attest having made that same “fat finger” mistake at least once. Brands aren’t getting the traffic either, even though they have a ton of places to stick adds.
The bottom line is that, well, there isn’t really a good-looking bottom line in the mobile ad business. The combination of lots of inventory and low conversion rates means that mobile ad revenues pretty much suck. Research published earlier this year reported that for every page viewed on a mobile device, publishers get only about 20 percent of the revenue they’d get from a desktop device. That can only mean that brands are getting even less of a return. Even the GOOG is feeling the pinch. Its last quarterly earnings call suggested that the lower than expected ad revenues were the result of the shift in eyeballs and ads to the mobile channel, which did not deliver the conversions. If publishers and brands thought that the shift from print to online was rough, I guess they ain’t seen nothing yet.
Since it’s clear that mobile devices are throwing a real wrench into the traditional advertising business, the logical question is what exactly will drive the conversions – and sales – on these devices? Thanks to the fact that all consumers (or most of them) now run around with their smartphones and/or tablets, advertisers that want to reach consumers with a value proposition of some kind find that they actually have a lot of other options to pursue that have nothing to do with shrinking desktop ads down to the mini mobile screen. There are a raft of startups and emerging players and “location-based demand gen” tactics that use offers and other promotional tactics to match advertisers with the consumers they want to reach in real time in the places where they are most likely to take an action. Twitter has opened its platform to businesses and merchants that want to reach relevant people in specific geographies with an offer stated in 140 characters or less. Foursquare has done something similar leveraging its user base and app. PayPal’s acquisition of Where (now rebranded PayPal Media) gave them the location based technology platform to help its retail partners put offers in front of relevant PayPal customers. LevelUp, through it’s a branded, white-label application, enables merchants to design their own offers based on triggering events that drive and even time-shift demand for them, e.g. rainy day offers, Black Friday respites, etc., all wrapped around an easy way to pay. Catalina Marketing is integrated with the POS systems of most major grocery and drug stores and provides offers, now via the mobile device, to consumers based on their spend, down to a SKU level and even while consumers are pushing their grocery baskets down the store aisles. MasterCard’s offer platform, with its open API, enables any third party with an offer to make it available to the MasterCard issuer network, becoming the de facto distribution platform to consumers with MasterCard branded cards.
In each of these situations, Twitter, Foursquare, PayPal, LevelUp, Catalina and MasterCard have taken on what once had been the domain of an ad agency – designing a distribution strategy and platform, templates for producing offers, and the data analytics that help brands directly target their messages and offers to the most relevant consumers at the most relevant times throughout their shopping journey. But, what’s being put in front of consumers isn’t a slick tag line or a pretty ad, it’s something of value, not something of relevant value, that increases the likelihood that a consumer will actually want to buy – and not just laugh at a clever ad and move on. And, unlike the typical advertising business model, these players can create business model alternatives that more directly tie their monetization models to sales, and not just clicks. Now all of a sudden, we have an entirely new way to get consumers interested in buying stuff, which is the goal of advertising in the first place.
What could make this new way of persuading consumers to buy is something discussed in an article that appeared in the New York Times yesterday. This piece turned on its head one of the most fundamental assumptions of what drives consumer purchase behavior when they are presented with a variety of options.
Itamar Simonson, a Professor of Marketing at Stanford, developed a body of research that has basically blown up the notion of “the compromise effect,” which up until now has been the cornerstone theory for deciding how pricing, product bundling and financial forecasts related to product sales have all been constructed. The compromise effect is what happens when consumers are given multiple variations of a product or service, and almost always choose the selection in the middle – thus a “compromise” between the low and higher priced selections. The theory asserts that consumers typically discard the low price option as not good enough and the high priced option as too excessive. The middle of the road option makes consumers feel smart about not spending too but getting more value than just the basic model.
Professor Simonson’s work has blown that to smithereens. The “wisdom of the crowds” is now what rules the day, he has found, and consumers access that wisdom via user reviews. Simonson’s big insight is that, now all of a sudden, price is far less important than users used to think and will spring for the more expensive choice when user reviews support that selection. Although Simonson’s work doesn’t reflect much of a movement upmarket for those who chose the low option, probably because those people are price constrained, there’s a strong and appreciable shift from the middle of the road choice to the higher priced option. This was the case regardless of stated brand preference – if a consumer’s “favorite” brand was less expensive than the higher priced option, but users rated it more favorably, consumers opted for the higher price selection. The big and important news here is that consumers place a lot more trust in their fellow human beings to help make their decisions than they do tag lines, advertising messages and marketing campaigns, even if they end up spending more in the process.
I actually saw this in action myself not long ago. A colleague was making a hotel reservation in New York, which is a pretty insane/expensive thing to do right around Christmas. There were two hotels advertised for about $150/night less than many of the cheaper options. A check of the user ratings unlocked the reason why. Both had very bad user reviews because of ongoing renovations and complaints of loud noises. After that review, the decision was made: spend the extra money and sleep in peace regardless of price and the website description touting the elegance of the hotel.
We’ve also seen the power of buyer and seller ratings in the eBay marketplace in driving sales. Having a good seller’s rating is critical because even the difference between a seller with a 98.9% rating versus a 100% rating on a bigger ticket purchase is a risk that many buyers won’t take. And since eBay now has the “Add to Cart” option for many of its items, committing the buyer to paying full price for that item, high seller ratings will only increase the likelihood that more buyers will actually take the step – and spend more to get the item. eBay sellers work hard not only to deliver a good product at a fair price, but to deliver excellent service in order to maintain those high ratings.
So, if Simonson’s research is to be believed, even discounts take a huge back seat to what the community has to say about the value of a product or a service. This has some huge implications. It puts the onus squarely on the brand and/or the retailer to create the best product or service and experience it can possibly produce and to rely less on discounts and offers – which should actually be welcome news. It makes more credible the claims that user reviews really do matter and influence sales in a material way, and that to stay relevant, those in the payment and commerce ecosystems that are trying to reinvent the buying and shopping experience need to respect, acknowledge and accommodate this new reality, including the retailers.
We actually debated this topic a little bit of this last week as part of our Mobile Commerce Insiders’ digital discussion.
The hypothesis we kicked around is that as the economy improves, consumers will naturally demand more than offers and discounts to keep them as loyal clients and that retailers will increasingly look to these third party payments and commerce platforms to help capture and deliver additional value via the mobile channel. We touched on the merits of using mobile devices to reacquaint consumers with what was described as the ‘human’ element of retail so that the variety of frictions that occur in the physical and online store experience can be reduced and a new shopping experience introduced. Sources of value that retailers and brands seem eager to embrace include making it quick and easy for consumers to check out of the store, eliminating standing in long lines, giving consumers visibility into available inventory during the decision process, recognizing and actioning valuable customers in a meaningful way and even enabling price discrimination based on levels of spend, frequency and loyalty. Then, add to that, the ability with iBeacon and beacon technologies to message consumers in the store about what others are buying when they’re there and how satisfied those consumers are with those purchases and you have an interesting new opportunity to disrupt and disintermediate traditional advertising by delivering the information and experience that makes shopping more valuable, and even fun, for merchants and consumers.
For payments, all of this simply reinforces what we’ve been saying now for a while. The act of “checking out” or simply paying for something after a consumer’s selections have been made and payment tender selected, is going to become a commodity, buried way, way, way inside of everything else that is wrapped around a shopping experience. How consumers then view “payment,” how merchants want to pay for it, how innovators and the ecosystem want to leverage those payment and processing capabilities, also runs the risk of being viewed as a commodity.
That means that the future value – literally and figuratively – will accrue to the platform and the apps and the third parties that operate, power and enable the layers around payment that get consumers to buy more things. Those activities have typically been the domain of very different ecosystems – the advertising and loyalty ecosystems. Quickly, and perhaps even more quickly than any other disruption caused by mobile, technology, the cloud in the payments and commerce ecosystems, we’ll soon see the impact of this shift. The advertising and loyalty ecosystems will simply become part of the payments and commerce platforms – recast, redefined and repackaged in a way that can finally help retailers answer the question that retailer John Wannamaker made so famous decades ago: the 50 percent of their advertising spend that really isn’t working for them.