Offers that Make the Web Go ‘Round

In thinking about our topic from last week, the Ringtone Ecosystem, it brings up an interesting point with the ringtone space, that mobile subscription marketing isn’t mobile marketing. The multibillion dollar projections for mobile advertising have nothing to do with the mobile marketing that those in the performance marketing space think of as mobile marketing. Ringtones are a purely web based product that just happen to use the phone as the billing mechanism as opposed to using this vaunted third-screen as a means for ad inventory. So the question then is, "If ringtones aren’t a part of mobile advertising, then what are they?" In looking into the answer, what we discover is that ringtones have more in common with Oolong Tea offers than any campaign you might see running through a company like AOL’s Third Screen Media. For the cynics, it has nothing to do with the fact that some people find both offers to be a scam. Instead, both offers are continuity programs.

Defining continuity programs is almost easier in terms of what they aren’t than what they are. Continuity programs, like lead generation, fall under the umbrella of online customer acquisition. In the world of lead generation, the marketer takes a loss on the initial cost of media. They pay the traffic source regardless of whether the end user pays. The lead generation company, whether it is through email upsell or, as is more commonly the case, through some form of call center, must take that interested consumer and convert them to a real customer. So, even when paying traffic sources on a cost per lead basis, lead generation is still a shared risk. It’s also why new entrants into the space will be very cautious about their spending because it often takes the company buying the leads thirty or more days to know what percent convert into a customer. A company like Goldpaq.com, a newer entrant in the used jewelry market, sends out a physical envelope to everyone who fills out a form (cost), must wait for the envelope to return of which only a fraction will, evaluate the value of each that does return, and then back that amount into the current cost per lead to ensure its profitability. That process takes at the very least fourteen days and easily thirty days on average. If they had an affiliate sending poor quality leads, uncapped, they could easily find themselves spending hundreds of thousands of dollars without any return. Cost per sale programs on the other hand don’t have this risk. A travel affiliate program that pays a percentage of the sale price or Amazon.com’s which does the same has a much smaller liklihood of losing money, and a shorter window to know if fraud occurs.

Continuity programs fall in between lead generation and cost per sale. They charge people at the time of the offer, be it through their mobile device like ringtones, or via a credit card for the rest, but unlike cost per sale, the act of charging the user doesn’t guarantee profitability. Take a ringtone offer that pays $15. A user who signs up is charged a penny under $10. The content company behind the offer sees at most $6 of that $10 (the carriers taking the rest). More complicatedly, not all people will get charged, so the net effective is less. You might think that all it takes is for a user to stay on three months for them to break even, but users drop off each month (not renewing), so once factored in, you are often looking at a payback period on the low end of six months and the high end a year. And that doesn’t even begin to take into account that those paying out to the traffic source often don’t even get their first check for three months. In other words, continuity is no guarantee of money. Dating is much the same. They pay on a lead basis, but they make their money only if users enter their credit card and then stay members. Netflix is no different. They pay more than they earn on the first month in revenue, and revenue doesn’t even take into consideration the actual cost. That $14.99 per month isn’t anywhere near pure profit.

The secret behind many continuity programs lies in a particular business practice, the rather ungainly sounding negative option billing – a practice in which goods or services "are provided automatically, and the customer must either pay for the service or specifically decline it in advance of billing." Negative option billing is what allows a company to offer a trial and bill the cusomter later (for instance after 30 days, or in the adult world, five minutes) and on a recurring basis thereafter. While there is nothing inherently unethical or illegal with negative option billing, not surprisingly, though, it leaves itself open for abuse on multiple fronts. Aggressive marketers have found ways to obfuscate the true nature of the billing amount and cycle, only for users to discover a charge for two to three times higher than they were expecting. And, because continuity advertisers a) pay several months revenue as a bounty upfront, and b) only make money if users continue with a program (hence "continuity"), they often have an incentive to try and dissuade users from discontinuing. A classic example is actually from an incredibly well known brand, albeit a much battered one in recent years, AOL. There are horror stories of people trying to cancel their dialup service, and that’s from a company you can get a hold of. There are so many other fly by night firms with never answered phone numbers, countless merchant accounts to manage chargebacks and no ethics that it’s enough to make people want to ban not just negative option billing but all continuity programs. If that happens, performance marketing is in trouble.

The amount of revenue generated as a result of continuity programs will astound any who haven’t stopped to think about it. And, given the sensitivity surrounding many aspects of the performance space, now is the time to take a closer look at what is running and its impact on the user.