DRIVING FORCES OF CHANGE IN MOBILE ADVERTISING

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1 DRIVING FORCES OF CHANGE IN MOBILE ADVERTISING About the author: Cheryl Morris is Director of Marketing at Nanigans, a venture backed technology company driving the next evolution in media buying with its predictive lifetime value SaaS platform. Nanigans is a leading Facebook Strategic Preferred Marketing Developer (spmd), working with the world s largest performance marketers in sectors across retail, gaming, travel and more. AN INTRODUCTION Seemingly every year for the last five years marketers have said, next year will be the year of mobile advertising. When in reality, we have simply become accustomed to an incredibly slow pace of innovation. Yet it did not take Facebook five years or even two years to launch their mobile advertising business; it took them a matter of months. In less than a year s time, Facebook became the market leader in mobile display advertising, outpacing giants like Google and Apple to control approximately a quarter of all mobile display ad revenues. What represented zero percent of Facebook s ad revenues a year ago is on track to be a billion dollar business this year in the United States alone. Why exactly have mobile ad dollars moved so quickly to Facebook? The answer is simple: Facebook and Preferred Marketing Developers like Nanigans are solving very real challenges on behalf of mobile marketers challenges that center on the three core pillars of any successful advertising campaign: 1. Targeting 2. Creative 3. Optimization Combined, these driving forces of innovation have resulted in advertisers achieving times higher clickthrough rates on Facebook mobile as compared to desktop and, most important, are revealing the true ROI of mobile ad investments.

2 1. TARGETING FROM INFERRED TO PERSONAL IDENTITY HAS FINALLY ARRIVED Facebook has brought a 750 million person audience to mobile. But we are not going to focus on how this scale is more than double that of which mobile ad networks offer. Nor are we going to focus on how engaged these 750 million people are, spending a quarter of all their time in mobile apps on Facebook time that in fact exceeds the average time they spend each day on Facebook desktop. While this scale and engagement is impressive, the real driving force of change in mobile advertising centers on the fact that each of these 750 million people have identities an incredibly rich profile of attributes that marketers can target on mobile. Facebook knows a plethora about us, including our interests and affinities from what we read to the brands we love and the apps we use. All of this information, from demographics and affinities to actions and purchase intent, is targetable on Facebook mobile. LEAVING SPRAY & PRAY TACTICS BEHIND Alternative mobile ad targeting lacks identity almost completely, with targeting either not personal or inferred. Take device targeting as an example. While owning an iphone 5 may be indicative of greater purchasing power than owning an iphone 3GS, it is certainly not indicative of what the person who owns that device may be interested in purchasing. Or take gender targeting as another example. When a mobile ad network tells you they are targeting females, what they really mean is they are delivering impressions on publisher sites and in apps that cater to a female audience. Sure, the message could reach a female, but there is also a high probability it is also reaching males. Ultimately this lack of identity has resulted in an industry that relies on spray and pray tactics, where mobile marketers are buying blindly and thinking opportunistically that those people they are putting impressions in front of will actual convert into customers.

3 FACEBOOK HAS SET THE TARGETING BAR HIGH Facebook s rich targeting data, from demographics and psychographics to behaviors, have quite simply set the bar high on mobile, seemingly leaving the rest of the mobile ad ecosystem in a state of shock. Marketers have an absolute trove of targeting data and combinations to leverage with Facebook mobile, and ad dollars shifted quickly as a result. While we will not highlight all of Facebook s mobile targeting parameters, one we are most excited about has to do with a marketer s known CRM data. Custom audience targeting enables mobile marketers to upload information from their CRM database such as s and phone numbers, and Facebook will match this data with profiles containing the same information (without ever revealing this personal data. This process creates a targetable audience of known customers you can then remarket and reengage, or use to expand targeting into look-alike audiences by leveraging affinity models. Custom audience targeting has proven a lucrative strategy for marketers from retail to gaming, with Nanigans clients seeing results like increasing the ROI of campaigns by 5X and driving 100% same-day ROI multiple days in a row (see Figure 1 below). Figure 1 - Case Study, Impact of Custom Audience Targeting

4 2. CREATIVE FROM PALTRY TO COMPELLING A JUXTAPOSITION When we think of mobile ads, the first images that enter your mind are likely similar to the below examples tiny banner ads that sit at the top or bottom of the mobile apps we use or on the mobile web pages we browse. Figure 2 - Mobile Banner Ad Examples Enter Facebook. It is evident in comparing the above ads to the below that Facebook has changed our expectations around mobile ad creative. Figure 3 - Facebook Mobile App Install Ads

5 THE PERFECT STORM Facebook mobile ads provide creatives in the advertising industry the huge canvas they have been craving for years on mobile, as you can see in Figure 3 in the screen real estate they command on both smartphones and tablets. Beyond this screen real estate, these ads act like content sitting in the News Feed with the same look and feel of the content being shared by friends, family and colleagues on Facebook. The ads feature social engagement, such as Likes, comments and shares making them even more compelling and relevant. As an end consumer, we actually want to engage with this ad content. Arguably most important, Facebook has brought ads to mobile that are designed to drive specific behavior, such as Page post ads and mobile app install ads. Below we dive into the anatomy of one of these ad units more in depth. DRIVING APP DISCOVERY & ENGAGEMENT Mobile app install ads, featured in Figure 3, are a great example of how Facebook s driving innovation in mobile advertising. These ad units have been adopted quickly, and currently represent a quarter of the ad spend run through Nanigans software platform on a given day. Retailers, mobile game developers, travel companies and more have been quick to adopt the ad units, and it is easy to understand why. Facebook designed this ad product to help developers drive discovery and distribution of their mobile apps. They provide a compelling creative opportunity and heightened relevancy with social context as outlined above (including notes of how many of my friends are currently using the app to a more general 5- star popularity rating). Additionally, these ad units feature a strong install now call to action and were designed to ensure as seamless of a conversion funnel as possible. Upon click of the ad unit, the end user never has to leave Facebook in order to install the app. Instead, within the Facebook News Feed experience, the user is redirected through a popup to the proper app store (be it

6 the Apple App Store or Google Play). After clicking install, the user is left right back to browse the News Feed where they left off. As an advertiser, the compelling creative opportunity, heightened relevancy offered by social context, a strong call to action, and a seamless conversion funnel has lead to incredible results with Facebook mobile advertising, where we are seeing on average over 1 percent clickthrough rates and results like climbing the mobile app store from #253 to #5 in just ten days. 3. OPTIMIZATION FROM PROXIES TO TRUE ROI A HISTORICAL PERSPECTIVE In the early days of mobile advertising, marketers measured success simply by way of views (otherwise known as ad impressions). Marketers paid for a certain volume of ad impressions, effectively buying eyeballs. The cost per impression (CPM) metric became the gold standard for pricing and measuring mobile marketing success. Paying for views on mobile evolved quickly into paying for clicks. Marketers paid not just when an impression was delivered and the ad was viewed, but when someone actually clicked the ad after viewing it. The cost per click (CPC) metric became the defacto way to buy mobile media for years. More recently this CPC metric has evolved into marketers paying only when a mobile ad generates a specific action immediately after the click such as an app install or registration, the cost per action (CPA) metric is currently embraced by the industry as the most effective way to buy mobile media. While it is leaps and bounds better than buying eyeballs and clicks, it s certainly not perfect. Why? Because buying on a CPA basis does not consider downstream behavior in other words, what happens after a person takes that immediate action like an install.

7 Figure 4 - Downstream Behavior Did the person who installed the app never open it again? Or did the person install and purchase over and over again and become one of your best customers? Who exactly did you just pay to acquire? CPA doesn t consider the quality of the customer acquired. PITFALLS OF CPA BASED BUYING AN EXAMPLE Before we dive into an example, let s understand how CPA relates to lifetime value and ROI: CPA (cost per action): how much it costs to acquire a customer LTV (lifetime value): how much value you earn off that customer over time ROI (return on investment): how much greater your LTV is than your CPA Let s take the example of a clothing retailer, advertising t-shirts. The retailer determined through taking an average of their customer acquisition costs that they are willing to pay up to $10 to acquire a customer through mobile ad channels. Steve, a 21 year old male, purchases the t-shirt but never purchases again from the retailer. While Mary, a 40 year old female, buys the t-shirt and in the coming weeks continues to purchase clothing for her entire family. However, because of the hard $10 CPA, the retailer never ends up actually acquiring Mary. Why? Given there is a bit more demand for her, Mary has a CPA at $12 slightly above the $10 average.

8 This leaves the retailer with a customer pool filled with Steves, who buy once and never return. And means the retailer missed out on acquiring their most valuable customers like Mary, who become lifelong customers and continue to purchase over and over again. Let s take a closer look at the numbers. Steve costs $9 to acquire, while Mary costs $12 to acquire. Mary is 33% more expensive than Steve a considerable increase. Steve purchases $10 in merchandise over time, while Mary purchases $50 over the same time period. Mary generated 400% more revenue than Steve an even more considerable increase. Figure 5 - Pitfalls of CPA, An Example (Part 1) Ultimately, this means Steve generated an 11% lifetime ROI ( ($10 - $9) $9 ) and Mary generated a 317% ROI ( ($50 - $12 ) $12 ). A 33% more expensive audience ended up generating 400% higher lifetime value and 28X the lifetime ROI. But it gets worse. If the retailer were buying on a CPA basis, the ad network it was buying from was actually incentivized to buy cheaper audiences than Steve so they can pocket higher margins. Like Broke Brian and Debtor Dan in Figure 6. Figure 6 - Pitfalls of CPA, An Example (Part 2)

9 Nanigans saw this occur with marketers purchasing ads aimed at acquiring fans, or Likes, on Facebook over the last few years. A marketer would approach an ad firm and say, We want to acquire 1 million Likes at $2 each. The ad firm would say, No problem, and pay $0.50 to acquire very low cost audiences, pocketing the $1.50 margin as profit. And now these same companies who bought Likes in this way (on a CPA basis) are now understanding the composition of their fan bases on Facebook and questioning the customers they actually bought. Luxury brands offer a prime example of this. An affinity analysis may show a majority of people acquired on their Pages have average incomes under $20,000 aspirational buyers who likely could not afford the luxury brand s products. Had the luxury brand instead focused on acquiring high value fans in line with their purchasing customer profiles, their engagement and community management strategies would be more likely to result in generating incremental sales. THE 7 DEADLY SINS OF CPA BASED BUYING Clearly there are inefficiencies with CPA based buying, despite the fact that the mobile industry has embraced it as the best way to buy. Below are what we refer to as the the 7 deadly sins of CPA based buying, which all center on the fact that this proxy metric does not consider downstream behavior nor the lifetime value of customers. 1. Results in opportunistic buying. As exemplified with the example above, if you re not buying based on downstream behavior, you re buying opportunistically with hopes that those who take an immediate action will turn into lifelong customers. 2. Encourages arbitrage based models. And as also illustrated in the example above, CPA based media buying offers a breeding ground for arbitrage based models. 3. Discourages buying highest value audiences, and encourages buying lower value audiences. Because your CPA is based on an average of your customer acquisition costs, this average by definition is discouraging buying high value audiences who may cost slightly more in that same way it encourages buying low value audiences who cost less.

10 4. Values all customers as equal. Furthermore because CPA is an average, this metric is a proxy that values all potential customers as equal, when in reality you know some customers are far more valuable than others. 5. Limits campaign scale. If you re buying based on a hard, inflexible CPA and not willing to pay more, you ve limited the potential universe of people you can reach. By being willing to buy slightly more, you can scale your campaign more effectively. 6. No price elasticity. CPA s role in limiting campaign scale is especially the case during times of high demand when costs rise, like the holidays when people are buying most. If your hard CPA is inflexible to these market conditions, you miss out on acquiring customers at a time when they are in prime buying mode. 7. Overpay for cheap audiences. Last but not least, since all your competitors are buying on CPA, this demand is actually driving up the prices for cheap audiences and you re overpaying for them. So, how should mobile marketers optimize their ad spend to avoid all those pitfills? The secret lies in downstream behavior moving beyond the proxy CPA metric to lifetime value and ultimately lifetime ROI. LIFETIME ROI THE NEXT EVOLUTION IN MEDIA BUYING After building technology at Nanigans that measures downstream behavior, we saw strong trends in that the highest ROI audiences were also typically the most expensive to acquire. This is when we doubled down on our lifetime ROI prediction, bidding and optimization algorithms. Does this lifetime ROI based optimization work? Below are two case studies. The first is a longitudinal case study, and the second representative of a shorter timeframe. Case Study 1 Fast Growing Ecommerce Company A fast growing ecommerce company had the goal of acquiring new members in an ROI positive manner. They did not just want to acquire people who registered; they aimed to acquire quality, lifelong customers who would purchase over and over again.

11 After 6 months of working with Nanigans, the retailer had acquired a 4.5 million person member base. 38 percent of those people were acquired through Facebook ads. This in and of itself is impressive if you are reading this ebook with the bias that no one clicks Facebook ads. However, more impressive is the fact that the customers we acquired by buying based on true ROI were on average 3 times more valuable than those acquired through proxy CPA based buying methods. Case Study 2 Leading Mobile App Developer A leading mobile app developer approached Nanigans with the goal of acquiring customers who not only installed their mobile app, but who made purchases in the app over time. Specifically, the app developer aimed to reach audiences who delivered a 49 percent return on the ad spend investment (ROI) within 7 days of being served a mobile ad. This goal was set based on the performance the app developer was achieving through other mobile ad networks when optimizing on a CPA basis. The developer leveraged mobile app install ad creative, and targeted the app s core audience of females over the age of twenty from English speaking countries across the globe. Most important, the developer optimized at an audience level for lifetime ROI in order to acquire customers who not only installed, but who installed and monetized. The results: the app developer achieved the 49 percent ROI goal in half the time they were achieving this through mobile ad networks. And in the same 7 day time frame, the developer achieved 74 percent ROI 51 percent higher than when optimizing for CPA. Figure 7 Lifetime ROI Case Study, Leading Mobile App Developer Lifetime ROI Optimization 51% Higher ROI! Mobile ad! networks! (CPA)! 49%! ROI! Nanigans! (ROI)! 74%! ROI!

12 And after two weeks, the app developer was nearly breakeven on its ad spend (in other words, the customers it had acquired through Nanigans had purchased more than the cost to acquire them). All of this illustrates that CPA, by definition, means you are not buying for lifetime value or lifetime ROI. EVOLUTION IN MOBILE ADVERTISING There is no doubt that there has been a huge evolution in mobile advertising in the last year. There has been an evolution in what we expect from targeting, an evolution in what we expect from creative, and an evolution in how we approach media buying: 1. Targeting is no longer inferred or non-personal; instead, we have a vast and rich targeting set to choose from. 2. Creative is no longer limited to tiny and ugly banner ads; instead, we have the opportunity to leverage ads that provides creative a large canvas and acts just like content. 3. Optimization no longer has to be based on proxy metrics like CPA; instead, we can measure with transparency and for true lifetime ROI. The pace of innovation in mobile advertising is finally moving quickly, and with much thanks to the bar the Facebook ecosystem has set so high in targeting, creative and optimization. Today, just like you would not run advertising campaigns on desktop without buying on Facebook, you certainly cannot think about buying ads on mobile without buying on Facebook.