When Are Higher Marketing Costs A Good Thing?

The rapid migration to smartphones and tablets from laptops and desktops has happened at a breath taking pace. While that has created a massive business opportunity, the supply of mobile apps and mobile websites has grown even faster than our demand for that content.

The result is that the cost to advertise in mobile has gone down relative to the cost of “old” digital advertising, e.g. formats optimized for desktops and laptops.

For digital advertising companies such as Google (including YouTube), Yahoo and Aol, which have flourished since the dawn of the Internet, this shift to mobile presents a particularly threatening navigational challenge. On the one hand, they are poised to migrate with their users by building mobile-friendly content and advertising formats. On the other hand, sustaining growth in an environment of advertising price deflation is really tough.

Every company active in mobile channels has to be concerned about this. There is nothing guaranteeing that our business won’t become like radio, which is ubiquitous and nearly always-on, just like smartphones, and yet not exactly a hot growth industry.

That’s why a couple of stories this week are must-reads for anyone responsible for their company’s mobile monetization.

First, the cost of getting a user to download a mobile game spiked in December, 2013. I attribute some of the 288 percent year-over-year increase to seasonality; a lot of people get new phones as gifts in December, and those new users are eager to snap up apps. That increased demand almost certainly contributed to the price increase.

Second, mobile search and display advertising spending increased over 50 percent in 2013.

This surge in advertising demand and the cost-per-game install comes as welcome news to the companies building the mobile infrastructure and inventory advertisers need to reach their users. It relieves some of the revenue pressures facing the industry.

On the other hand, a third story emerged recently that reminded me of the ongoing debate over U.S. federal government spending. Specifically, it always seems that in the short-term, spending should continue unabated, while in the long-run, nearly everyone agrees on the need for some restraint. The problem lies in the fact that we never seem to exit the short-term.

Similarly, according to this article, in the near-term mobile advertising supply, including apps and mobile websites, will continue to grow faster than consumers’ and advertisers’ demand for that inventory. That means that pricing for this inventory should continue to trend down overall. It’s not until the intermediate term, specifically 2015-17, that ad supply and demand should shift to something more resembling a seller’s market.

It’s staggering to think that 50 percent increases in spending on mobile search and display and a nearly 300 percent increase in the cost per install for mobile games isn’t explosive enough to outstrip the overall increase in ad inventory supply, but that seems to be the case.

What should mobile marketers do in this turbulent climate?

First, enjoy the relatively depressed prices of mobile marketing. They’re still a bargain. Check out the cost per user acquired for some staples in other industries, including a short list here, and you’ll see that getting a mobile users is still relatively cheap. Now is a good time to buy. If you can afford to purchase mobile inventory now that is scheduled for later in the year, you’ll almost certainly pay less for doing so.

Second, and just as important, take this opportunity to make sure that your per user cost of acquisition is sufficiently lower than the revenue you generate from your mobile customers. Capture all costs and revenues, including the advertising your mobile apps and sites serve and the transactions they generate. A rapidly changing pricing climate may require that you revisit your ROI estimates on a monthly basis so that you don’t suddenly find your mobile business is under water.

Managing your mobile P&L these days may seem like managing a country’s currency in a hyper-inflationary environment, but don’t let the wild swings and rapid innovation deter you. Some effort, no matter how imperfect, is better than letting go of the tiller.

Meanwhile, continue to root for more price increases.

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