Some thoughts on advertising... from a tech guy

Phil Wainewright writes a blog over at CNET about Software as a Service (SaaS). SaaS is a very hot technology these days (and has been for a while). It's also one I'm intimately involved with as we're building our business around it.

SaaS is about application development so it's not surprising that many SaaS commentators (like Phil) end up talking about application monetization and hence, advertising.

Phil's stance is that the ad sponsored application model is fundamentally flawed. I agree with him, but not for all the reasons he states.

He lists three main arguments:

"1. Advertising is the creation of a disconnected era when businesses needed some way to get a message out to prospective customers that they couldn’t reach directly. The purpose of an ad is to motivate the prospect to get in touch. The Web, as we all know, puts us all in direct, real-time contact with each other, wherever we are in the world. Instead of advertising a message and waiting haplessly for a response, businesses can proactively connect directly with their prospects, reaching out to them in contexts where they’re ready to buy. What counts on the Web is product placement, merchandising and other forms of direct promotion."

Advertising wasn't created because we were 'disconnected', it was created because we were CONNECTED - connected in the sense that we watched the same shows, read the same newspapers and listened to the same radio stations. It exploited economies of scale as a many-to-one communication medium. It was/is not, as Phil seems to think, a sales tool. Most advertisers don't want people to 'get in touch', they want them to buy a product. This is just confusing the role of Marketing and Sales.

"2. Placing ads in software is the height of absurdity. It’s software for goodness sake — people use it to get things done, not to read ads. Instead of wasting valuable screen space publishing banners and text ads, why not embed some functional links, buttons and menu options that add some value to the task in hand? Cut out the ads and substitute a direct connection to a useful service. Add a pay-per-use clipart library to an online slideshow editor, embed a link to a live tax expert in an online accounting application, build workflow into an online travel booking service that conveniently helps the buyer choose and book flights, transfers, hotel and dinner."

Couldn't agree more. But there are some glaring examples of where advertising in apps does work. Gmail for instance. Contextually relevant adds alongside email topics are actually useful. Just as ads for clip-art, photo services, or design services would probably get a lot of traffic in an online presentation tool. Making ads relevant to the task at hand is the key. And the ability to mash-up services in apps could potentially blur the line between an ad and a service. Where does the ad stop and the service start? Desktop gadgets are a good example of ad/services that meld nicely with workflow.

"3.There will never be enough online advertising in the world to support the software industry, let alone the entire Web. Below is a slide taken from a presentation I gave a couple of years ago to an auditorium full of marketing professionals, called (you guessed it) ‘Web 2.0 and the end of advertising’. While it’s true that software is a smaller industry than advertising, both of them pale into significance when you look at the entire value of the retail industry — or even more if you measure the total value of a year’s global trade. Instead of trying to carve up the bite-sized advertising pie, on-demand providers should claim a slice of all those real-world transactions by making it easier for sellers to find buyers."

Agree. The most powerful monetization strategy is to match buyer and seller. But the potential pie is a lot smaller than Phil makes it out to be. Transactions completed online is a better yardstick than retail in its entirety, or global trade (that last one is really stretching it). And then all the easy apples have been picked - search, online auctions, online retail, local search, etc.

I think argument number two comes closest. Ads in apps are just stupid. Especially if they have nothing to do with the task at hand.

Phil finishes with an insightful paragraph on the future of monetizing worklflow:

"There needs to be a reliable infrastructure for measuring whatever is due to each partipant in the partnership, and there needs to be highly effective workflow so that the user experience is seamless and convenient. The ease of funding everything through advertising has meant the giants of Web 2.0 (and many venture-funded startups) have neglected the more sophisticated infrastructure needed to support such functionality."

SaaS companies participating in a web of interconnected services that support workflow and carve up the proceeds is the future of application monetization. This will triumph advertising every time. Pity it's almost entirely fiction at the moment.

But that will change.

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What can we learn from gas prices?

I just caught this CNN article on the current state of gas (fuel) prices in the US. According to the article, the month of March 2008 saw the single largest fall in 'driving' by US residents since records began in 1942 - a 4.3% decline (or 11 billion fewer miles if that percentage decrease didn't feel large enough).

The fascinating thing about this reaction is that it's almost pure sticker shock. The article talks of whole families foregoing Memorial day camping vacations to set up tent in their backyard! As if the cost of gas has become so great as to preclude using it at all.

But this just isn't the case. Yes, the average gallon of gas in the US is now just shy of $4 ($3.93), but it's only 70c more than it was a year ago. 70c per gallon translates into $10-$15 more for a tank depending on your car (more for a large SUV). Those aren't break-the-bank numbers.

The reason for the decline is the price points that people are now seeing - $60, $70, $100 fills. When you are used to $46.73 for a tank and you hit $60, sticker shock kicks in - that familiar feeling of 'it can't be that much? Really?'.

As human beings. our thought process in the face of rising pump prices is:

I can handle that.
That's a lot, but within my budget.
Woa, that's pretty high, grin and bear it.
No, that's way too high - kids, we're camping in the backyard this year!

We hit a ceiling. A threshold that we can't/won't pass. We don't, as many people think, gradually reduce our level of demand at each increase. It only looks like that in aggregate.

This has implications for marketers setting prices. While you look at the overall numbers and see this perfect relationship between price and demand on aggregate, think instead of the thresholds you've crossed.

You need to ease people across thresholds. Good sales people know this instinctively. Marketers less so. But they also have the harder job.

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Do Facebook ads rock?

Ok, so I finally got around to the blog this week. Has been a hectic few days.

Over those days though, I have been running a test Facebook ad campaign to try and add to the available knowledge on just how useful FB is for advertising.

In my last post I talked about The Challenge Dividen's post looking at FB ads. Bob ran a FB campaign to attract Guitar Hero fans to his site. He achieved a 0.02% Click Through Rate (CTR) for his campaign. Pretty low. He also found that the CTR didn't differ between a targeted campaign and a non-targeted campaign. Which I found strange.

I left a comment on Bob's blog and we had a bit of back and forth. He challenged me to come up with some numbers. So I went away and made a FB ad.

Bob's basic argument was that FB ads are broken. At a 0.02% CTR they under-perform the industry average (for banners) by about a fifth (ie. they are one fifth as effective).

In my test, I managed to more than double his CTR by targeting a Guitar Hero friendly add to the Guitar hero fan base on FB. My ad's summary is here:

The add was this:It's basically the exact text on the front page of an online Guitar Hero type game. It's actually a really fun game. And not surprisingly, got more attention and clicks than Bob's ad - which was a site you could view people playing Guitar Hero.

So I got a 0.05% CTR. Wow you might say. Well, not so fast. I can see Bob typing right now. Yes, these are meaningless numbers. Basically, a FREE online Guitar Hero game shot out at a Guitar Hero loving population on a site, Facebook, where time-wasting games are a dime a dozen, I get a pitiful 0.05% CTR. Better than Bob, but still crap.

Another nail in the coffin for FB advertising. Run like the wind Microsoft or figure out a better way to monetize the social graph. Ads aren't going to cut it.

However, I actually set out to try and find why a targeted and non-targeted FB add would perform to a similar level. That is still very strange to me. So the next installment of this will be looking at a non-targeted add run over the same time period but a week apart.

If FB targeting ends up not working (again), then they have not only got a medium where ignoring the ads seems the norm, they can't even boast reliable user profiling. In my book, that has equally large implications for potential advertisers.

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Facebook ads don't work?

Interesting post over at The Challenge Dividend that talks about the experience of one Marketer's Facebook ad campaign.

The cliff-note's version is that a highly targeted Facebook ad campaign for a Guitar Hero live-streaming gig had the exact came Click-Through-Rate (CTR) as a completely un-targeted buy. Ergo, Facebook's advertising system is bunk.

The thing that caught my eye is that typically targeted messages of any sort do do better. It's very strange to find a targeted message doing the same or worse among a targeted group compared to shooting the same message out to the unwashed masses. It's more a statistical phenomenon than anything. Given two populations, one with a lot of Guitar Hero fans who find anything Guitar Hero fascinating, and the other with a whole lot of random people (including the odd Guitar Hero fan), the Guitar Hero message will do better among the Guitar Hero population. Assuming the message is relevant to Guitar Hero fans and that all Guitar Hero fans are similar in their preferences to Guitar Hero messages.

And these are pretty sound assumptions to make.

Ergo, if the CTR was the same among both populations, it's saying that Facebook simply isn't good ad identifying all its Guitar Hero fans. It's not necessarily saying that advertising on Facebook is broken and people are simply not interested in anything interrupting their socializing.

In truth it's probably a bit of both. I certainly don't use Facebook (when I use it, which is rare these days) to click on ads. But I don't use the Internet to click on ads either. Unless I am searching of course, then I find the ads all very highly relevant.

I want to look at relevant ads. Everyone does. If Facebook knew me better, it might be able to do that.

I'm a Guitar Hero fan, I just never told them.

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"How to run your car on water"

No matter how good your idea is - solving world hunger, solving world peace, finding a cure for cancer, or single handedly radically reducing the world's dependence on fossil fuels. If you don't give some thought as to how you're going to sell it, it won't sell.

And you end up with this.

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