The Naysayers are Wrong: Mobile Will Monetize Better Than Desktop

Wall Street and the media have heavily scrutinized leading Internet companies for not converting their mobile traffic into revenue. They see that mobile advertising CPMs are a fraction of desktop Internet CPMs, and that mobile revenue has yet to catch up to all the time spent on these devices. And they fret that this gap between revenue and time spent won't close.

These fears are ill founded. Yes, mobile phones are small computers. But people don’t use their phones exactly like they use their computers, and the way businesses generate revenue will also be different across these devices. New formats like in-stream ads will help boost performance, but the biggest breakthrough will come from something else.

Mobile will actually monetize better than the desktop. The mobile ad experience will feel different than old school desktop display ads. Mobile ads will feel more like helpful suggestions that take advantage of location, time of day and customer preferences to offer relevant, spur-of-the-moment incentives to buy stuff on your phone or in nearby stores. Fortunes will be made by businesses that tap into the unique advantages of mobile, such as location, connectivity, purchase intent and payment readiness.

Transactional Advertising

Fred Wilson recently wrote about three major mobile revenue models: app purchases, transactions and advertising. I think there’s more to it than that. The biggest opportunity for mobile monetization is actually a love child of his second and third categories –transactional advertising.

The first wave of advertising was driven by context (e.g. Yahoo display ads). The second wave was driven by intent (e.g. Google Adwords). The next big wave will be transactional advertising. These ads will bridge the gap between the mobile and retail world, and will be a major driver of revenue.

Nearly 70% of transactions are now influenced by online and mobile research. But 95% of transactions still happen off-line in physical stores. Purchase conversion rates are a mere 1-3% online, but well above 50% for many off-line retail stores, and over 90% in some grocery stores and coffee shops. Through transactional advertising, retail marketers can turn their online fans and followers into real world foot traffic. And the ads that consumers engage with can be directly tied to resulting offline transactions. This is groundbreaking.

Yesterday’s Announcement From Foursquare

Foursquare’s announcement yesterday of their "Specials for Credit Cards” is a great example of the emerging wave of mobile-based transactional advertising.

Here’s how Foursquare's new program works. Instead of carrying plastic loyalty cards or paper coupons, consumers can now easily add them to their existing credit or debit cards. If a Foursquare user registers his credit card once on Foursquare, he can begin to receive benefits automatically at the point of sale for his offline activities. For example, he can enroll in Burger King's loyalty program so that he gets a special prize for his kids on his sixth check-in. Or if he checks into, for example, a Toys R Us using Foursquare, he’ll get a $10 Toys R Us coupon that he can use then and there, or on a later visit to the store.

In addition to coupons and loyalty, consumers can also tap into other transaction-linked services including social media referral programs, gift cards and digital receipts.

The Foursquare program is built on top of a platform from CardSpring, a Silicon Valley-based startup, and First Data. This platform connects the online and mobile universe with the networks that power the electronic payment infrastructure of retail stores. This intersection of payments and advertising is highly fertile ground for marketers, and enables offline retailers to start using the online marketing tools that have been essential to the growth of ecommerce.

The Tip of the Iceberg

Offers tied to credit cards and the payment network will be a primary form of mobile-based transactional advertising. But there will also be other types of transactional ads, including mobile lead generation and cross-device retargeting.

Online automotive sites like Autotrader and Edmunds, and startups such as High Gear Media, are seeing their consumer traffic shift from desktop to mobile, and are also feeling pressure on ad rates as marketers shift their budgets from premium destination sites to buying audiences through ad exchanges like Google and Facebook at much lower CPMs. A shopper who is researching cars as he's out and about on his phone is a great prospect for the local Ford or Toyota dealer, and the lead generation conversion rates for consumers contacting dealers to get a quote is just as high on mobile as it is on the desktop.

Mobile-based lead generation is also driving revenue in other spaces including online real estate. Witness the rising stock prices of Zillow and Trulia and the growth of private companies such as Redfin.

Retargeting will also drive expansion in mobile advertising. Instead of just shoveling more marketing dollars into the top of the demand funnel, mobile marketers will increasingly focus on attracting high quality users, and on identifying and re-targeting lapsed users with their mobile marketing dollars.

Marketers will find customers who have established a relationship with them on the desktop, and target them with ads to also establish a relationship and encourage a transaction through mobile. Companies such as One Kings Lane have found that cross-device customers are several times more valuable than desktop-only customers.

Marketers will also re-target customers who have signaled mobile interest (for example through installing their app a few months ago and using it once) to remind and re-engage them through mobile, and to ultimately drive transactions. A user may have downloaded Expedia’s mobile app long ago, but need to be reminded of it now that she’s planning a trip. Getting the message to customers at the right future moment when they’re planning to buy will prove more rewarding than trying to find new, and as yet unqualified, customers.

The most effective mobile advertising won't be about making an impression. It will be about driving a purchase. Hundreds of millions of people are now never more than a few thumb swipes away from a transaction. This reality creates an unprecedented opportunity for businesses.

Disclosure: Greylock is an investor in several companies mentioned in this posting, including Cardspring, High Gear Media, Redfin and One Kings Lane.

Photo: Philippe Huguen/AFP/Getty Images