On the web; search is king of monetization. Not so in the mobile world. There are a myriad of open (do not require negotiations with operators) and viable monetization tools to choose from:
1.) Upfront License Fee:
- The most common due to the early success of the iPhone App Store infrastructure.
- Easy to grok for consumers – you pay $X you get this product.
- No trial period limits addressable market – some people need to try before buying.
- In the App Store there has been downward spiraling of prices towards $0.99 – without a runaway hit (1 million downloads) it will be very hard to make a living.
2.) Paywall (aka In-App Purchases)
- Another form of a license fee, yet a delayed one that encourages some level of trialing.
- Exposes additional content to the user e.g. a new level of a game, increased functionality, and more content (e.g. more article)
- Early data indicates a 1.9% conversion rate [source]
3.) Virtual Goods
- User purchases goods within the service e.g. more poker chips, equipment in a mob game, car accessories in a game, etc. These work well within role playing games where humans dress-up their personalities with paid virtual clothing. Game-makers also intentionally devise ways to slow down key actions within the game triggering an impulsion to purchase goods to save time.
- Zynga reported <3% conversion rate across all games [source] (I would suspect that mobile games have higher conversion rates given the tight purchasing integration)
- Com2U reported 35% conversion rate for their HomeRun3D app which far higher then the industry average [source]
4.) Search & Display Ads
- Most advertisers are simply extending their search & display ads to mobile without customizing them [source]
- With mobile search volume increasing dramatically (30% q/q and more in countries like Japan) and improved ad customization tools (AdMob has made good progress) advertisers will start to customize their mobile ads [source]
- If you believe the pundits mobile search ads will dominate 70% of mobile advertising by 2014 [source]. If this happens I believe this is due more to the familiarity advertisers have developed with the search product and convenience of extending their existing ad campaigns to mobile. Recall, display ads dominated Web 1.0 simply because they felt like ad products advertisers were used to buying in the offline world.
6.) Leads into Brick n’ Mortar Shops (Going in the opposite direction)
- Most ads aim to connect users to a virtual event – a web page to buy, download, or register for something. This goes in the opposite direction; it is an ad category based on connecting consumers to a physical presence in order to complete a transaction in a brick n’ mortars establishment. Other then OpenTable that has built a profitable business in this space everything else is experimental:
- With the exception of OpenTable determining the probability that a consumer completes a transaction in a brick n’mortar shop after clicking or calling is ad-hoc, at best.
- Apps like FourSqaure and Loopt are experimenting with redeemable coupons that simply require a user to show their coupon (from their phone) at the point of purchase. This is a viable boot-strapping solution in the short term, yet over the long term it does not provide the level of data accuracy or freshness needed to build profitable campaigns.
- Getting these ads to scale will require frictionless ad management tools and accurate and real-time data that provide merchants their true customer acquisition costs, otherwise their ad spend will be guess-work. With retail store operating margins of 2% [source] too much guess work is lethal. Getting to scale means providing advertisers accurate and fresh data that only happens with direct integration with point of sale systems.
- With millions of OpenTable reservations happening via mobile devices OpenTable can transition from a flat $1.0 per reservation to a dynamic pricing model. Consider the following scenario: if a user is on their mobile, a few miles away, looking for a table for three in a few hours when 35% of your restaurant is expected to be empty, and the average diner spends $20/head isn’t that reservation worth more then a $1.0?
7.) Promote Myself Ads (aka User-Based Advertising)
- A form of a personal classified ad that allows the user to promote the thing they care most about: themselves. So far, there is nothing inherently mobile about this product yet early data suggests that users are more willing to spend money on this type of product when using their mobile device: a Flirtomatic mobile user is 3 times more likely to spend money with Flirtomatic then a web user [source].
- Flirtomatic’s user-based-ad products encourages a user to submit bids in order to promotes their profile to the top of the search results for a 4 hr period. The CPM rates for this user-based-advertising are 3-4 times the CPM of brand ads [source].
8.) New Ad Formats: Mobile Video
- Beyond text and simple display ads there is a market for mobile video ads that provide a deeper sense of the product or service a user is considering. If your getting off an airplane in JFK after a long flight the last thing you want to do is sit in a smelly town-car for one hour in traffic. A 15 second video ad showing you the cars and drivers, the number of available cars that could be waiting outside in 15 minutes, and ratings from recent customers would help you decide which car-service to use. Furthermore, it allows the car-service to compete on something other then price — service.