The Future of Advertising Isn’t Banner Ads

I’m a product strategy guy at heart, but I work in advertising, and I’m not ashamed to admit it.

Really, the way I like to look at it is that I develop products that use non-transactional business models. Basically, I make money in ways other than you, the end user, paying me.

This is the future of what we know today as advertising, and what’s wonderful about it is that there are no banner ads. Instead, it’s a way the product is built and thought of from the very beginning, something many startups struggle with. As Jason Fried of 37signals puts it:

But the fact is, all of us must master one skill that supersedes the others: making money.

Advertising Today

It’s all about banner ads, right? I don’t think I’ve ever met an end-user who enjoys advertising, or even uses it as a resource on the web. It’s something that’s tolerated and ignored. What’s funny is that ad-networks & publishers continue to purvey this lie about targeting and enhancing the user-experience with your ads. I really do hear it all the time, straight from the horses mouth. The Kool-aid these people are drinking is crazy.

From a user perspective, and even for advertisers, It’s not getting any better as time goes on and ad-publishing mediums evolve.

In mobile display ads, it was reported recently that “61 percent of mobile application users ages 18-34 click or tap on mobile ads by accident more often than on purpose.”1. That’s astounding. I mean, mobile click throughs (or tap throughs?) already hover below 0.5% (not a typo, one half of one percent), and you’re telling me that over half of those taps are accidental? What a waste of money.

This isn’t a sustainable advertising model. It’s one in which advertising is an afterthought, and users just slap some ugly banners in their products in the hopes of making some money. Nothing is gained on either side.

Ideally, you can charge for your service. Getting a small and growing group of passionate paying users is what you should shoot for, especially if you can use a Freemium model like MailChimp’s successful one. But let’s assume you have a service that people wouldn’t pay for, or perhaps you want to grow revenue on an already paid service.

Step 1 is to have a huge user base. Startups are good at this. They suck at the monetizing part.

Here are ways that I see to monetize free (to the user) products that can replace traditional banner advertising.

Preferencing

If you operate some sort of storefront or intermediary that connects buyers with sellers, the sellers have an added interest in your service. This is sometimes seen as “sponsored listings.” It guarantees a seller gets seen.

One opportunity I see is in a service like rdio. If you’ve never used it, it’s a wonderful music provider, which for $4.99 allows you to stream a massive catalog of music legally. Musicians get paid based on how often their music is played.

Since musicians and labels get paid based on how often their music is played, there is a market to make sure your music is seen. Supposing rdio is big enough, what if musicians could expose their music to more users. Today rdio mainly only has charts for Top Songs and New Releases. Even better for rdio, they can track your listening habits, so a band might be willing to pay a higher rate to have their music seen on the recommendations.

The same would also be true of a service like Netflix, which recommends movies.

I saw a stat at SXSW in 2010, and Googling around for a bit couldn’t find a source, but supposedly Amazon’s “similar products” algorithm has been tested to show that a disproportionate percentage of users click on the first item. Amazon could offer up this as an advertising slot similar to Google AdSense, where they balance the relevancy of the product and what an advertiser is willing to pay.

Preferencing also works effectively in search. Google has perfected it in their display ads, but any system that returns a search result could do this. More on that in a bit.

Mapping

Location-based searching is a booming sector with the prevalence of smartphones. Google has started displaying “sponsored results” where if I search for something on Google Maps on my iPhone, I might get a similar retailer. Think of it like this – if I’m Lowes, I might pay for Lowes locations to come up when a user searches on Yelp or Google Maps.

Even with something like Airbnb, which allows users to search on a map, a listing provider might pay for their result to be the flag that pops up initially.

Rewards Programs

This is an age-old way for sellers to influence the purchasing decisions of buyers, but it could use some refreshing! Imagine if a store, let’s use Amazon in this case, offered a free way for users to earn rewards by purchasing certain items. When a new item is listed to be purchased on Amazon, the seller could opt to offer “Amazon Points” to entice users to buy it. Each Amazon Point would cost the seller a certain amount – which is how the rewards program would be funded.

It’s a simple way to influence buyers to buy one product over another, or perhaps purchase from one particular Amazon seller. It works today with Amazon Prime shipping, in that I’m more likely to buy from a seller who offers free Prime shipping versus one who doesn’t.

Intermediaries

Yes, the internet encourages disintermediation. However, there can be value in an intermediary, as I mentioned earlier in Preferencing. Think about the travel space where comparison shopping must happen across dozens of airlines and hotels. Traditionally, these travel intermediaries have made money through transaction fees charged to the travel companies.

However, imagine this as a media model. Kayak has pioneered this. Others like Hipmunk are doing the same thing. It starts with a commission paid out to the intermediary. But as a site reaches critical mass, a site like Kayak could charge these travel companies to be listed and/or a cost-per-click or acquisition each time someone booked through the site.

The incentive is still in the user’s favor. The intermediaries in this case would be incentivized to drive lots of users to their site and retain them so they keep coming back.

This could also work for a service like the real estate listing site, Zillow – assuming they reach critical mass, there could be a contingent of home sellers who would pay to be listed on the site.

The Future

The incentives are similar to display ads, but naturally benefit the end-user without encouraging nasty behavior2. Great user experience would be rewarded, not plastering 50 blinking flash ads all over your page. Your product must attract & retain a lot of people. If you are pushing users to purchase something, it’s in the product owners interest to drive quality traffic through the product.

Advertising in this sense, becomes a true conveyor of information, deeply integrated into a great product, not an annoying blinking afterthought that people accidentally click on.

This is what I do in my job every day. I joke that I plaster ads all over people’s products, but in reality I’m working to keep something free or low-cost to end users, and give sellers a better opportunity to reach paying customers. It’s a new way of thinking, and product people need to take notice, because there is a lot of money out there to be had.

  1. http://www.mobilemarketer.com/cms/news/research/9015.html []
  2. Such as spreading a 1,500 word article across 5 pages []
February 28, 2011