The coffee shops of Mayfair

AppearHere: why does ecommerce need physical retail and pop up shops?

Forward Venture Partners recently announced an investment in AppearHere.  AppearHere is a marketplace for pop up shops: matching vacant retail space with brands and ecommerce companies who need a physical customer experience.

Our investment thesis (as always) rests on the entrepreneur: AppearHere is led by the inimitable Ross Bailey our youngest investee to date.

There are also some other pretty significant parts of the investment thesis.

1) Online retailers will see physical retail as an ally not enemy.  All retailers need to give their customers the touch and feel of real life goods and ALSO their "brand experience": where the customer eventually buys will be less important.  Moo.com 's recent experiments are a good example.  As is the successful Rapha store.  As is the new "store" of House of Fraser in Aberdeen. The HOF store is particularly interesting: it stocks one of each of the top selling SKUs in a small shop in rural Aberdeen, but customer can buy all the products from in store tablets and have them delivered the next day.

So what?  So online retailers need physical retail and pop ups.

2) All brands need to get closer (and sell direct) to their customers: longer term the dis-intermediation of the retail world is inevitable.  Does Speedo really want to sell to Sports Authority or would it rather sell more product direct.  errr. What do you think?

So what?  So brands need to sell direct: pop ups are a great way to test it.

3) Many brands see shops as an advertising space for their products.  For example Apple sells 12% of it's products via the Apple shops but MANY customers first more experience them in the store.  Ask Leon Bailey Green nicely and he will tell you that many retailers see a direct correlation between where stores are/are opened and online sales in that region.

Brands see the store as a big advert.

Imagine a world where key retailer space is valued, NOT on it's turnover per Sq Ft but instead for it's available frontage and charged on a CPM basis...

So what?  So brands are starting to value retail space as CPM not as as CPA. 

We think those are three significant market drivers that create an interesting opportunity for a disruptive company.

The deal was led by star of Forward, Yannick Roux, in conjunction with the business builders Forward Labs: who bring early stage ideas to product/market fit.  With additional backing from Russell Buckley at BallPark Ventures and the rather special founders of TopTen.

 

Venture Capital into Ad technology reaches $580mn in 2008

I have got some research done for a speech at today's Ad:Tech conference to look at Global Investment into the online ad / technolgogy Category: I knew it was large but not trending to one billion dollars a year!  What's even more interesting is that this is only the disclosed data, and some of the deals that I know would push the total higher still.

Interesting to see that Europe accounted for $258mn of this which is 45% of the total. This is remarkable because European VC typically only accounts for around 20% of the USA on an industry-wide basis.  This just shows the strength of the European market for Advertising models.

Rather predictably, Ad-Networks was the largest sub sector by volume and value: partially explained by the sector being a little "mature " for VCs now and the best plays will have obvious scale.

Our recent investment round into European local advertising player Qype was announced too late to qualify as first half investment.  But Qype has a very innovative business model and is far more than just a UGC review site. There's been a lot of blog chat about Qype and I want to put forward our view in a forthcoming post.

I was also particularly interested to see five investments into companies who are measuring advertising effectiveness.  The great thing about the web is that it allows brands to quantitatively judge the success of campaigns.  We at Advent believe there is an exciting opportunity emerging for Advertisers to find out which half of their ad-budgets are being wasted.  We are very interested to see European companies tracking, measuring, analyzing, and quantifying online advertising effectiveness.

We're also excited to see companies who are helping brands develop new forms of advertising, especially online short form content, but more about that in further announcements...

Here is the powerpoint.

Ad Tech Paul Fisher

View SlideShare presentation or Upload your own. (tags: industry advertising)

Below is a list of the businesses and the amounts. If I have time (something my post rate will show I don't have lots of)  I'll add a little more "colour" to the list.

Ad Exchange   
AdJug             
AdGent 007      
ContextWeb     
TargetSpot      
   
Ad measurement                       
Digital Revolution Technology      
Vizu                                              
VoloMedia                                   
XPlusOne                                      
Integrated Media Measurement    

Ad network                
AdScale                            
Adconion
Mochi Media   
IGA   
Broadband Enterprises    
Demand media        
DirectoryM                  
Giant Realm               
Gigya                         
Graspr                         
Jivox                         
RockYou                    
SaysMe                         
Tremor Media           
Undertone Networks      

Ad technology         
Invidi Technologies   
Ads Clicks                  
Videoplaza                 
Keybroker                  
Coull                         
OpenAds                   
AdMeld                      
Click Forensics             
iBloks                         
Invision                      
Jobster                      
Kiptronic                      
MediaBank                   
MediaBoost                  
V Links                         

Agency                           
Uniteam Communication   
Bruce Dunlop & Associates   
i-level                               

Local Ads           
Local Labs           
Local Marketers  
WebVisible         

Mobile ads            
AD.IQ                  
Blyk                       
Acuity Mobile       
Ad Infuse               
mSnap                   
Ringleader Digital   
Smaato                  

Out of home advertising   
Ocean                              
Hanger Network                 
JobDig                               
SeeSaw Networks              

(Advent Ventures conducted the research using data from RealDeals and proprietary research.)

CPC, CPA, lead generation does not work

Idea
This is the idea that the old CPA and lead gen models are inadequate measures of performance and therefore their pricing needs to change.

Problem (s)

The problem here is knowing when a user clicks on an ad, and then buys a product, if it is as direct result of that ad.

What lies behind these issues is that click-through does not correlate to purchase.

It is worth a brief diversion to say a bit about why click-through does not correlate to purchase:

1) Clickers
Research shows that some users are just “clickers” and will click on anything. Clickers make performance marketing less accurate. Clickers are not stupid, they are your wife.  And they skew results.

2) Non clickers
Non-clickers make performance marketing less accurate:

“respondents said they were twice as likely to notice a web ad, not click on it, but visit the advertised site later (61 percent) as they were to click on an banner ad to reach a site (30 percent).”

DoubleClick Touchpoints survey, 2006

3) Click before purchase

The last click before a purchase is not the reason why that purchase was made.  Intuitively this makes sense: I am personally more likely to click on an ad for Dixons than I am for ABC Online electrics ltd. This is a result of 20 years of brand-building from Dixons.
The question then becomes: why should I pay a lead-gen fee or CPA to an affiliate if they have not done the work? This is the most potentially disruptive one to all those elegant business models that we are backing.

Solutions

How are people solving the above problems?

1) Clickers & non clickers

Agencies are trying to solve the problems posed by clickers but it’s not easy. One of the most compelling is that from Double Click who offer ”view-throughs”.  With View-throughs, lead generation / CPA is paid even if the browser buys within 30 days of viewing.  The problem is still far from solved.

2) Paying rewards based on effectiveness

If advertisers and their agencies are able to come up with one generic and widely accepted measure of effectiveness, then results can be paid.  This is a fascinating area and I have covered here  .

3) Media mix optimization
Due to the quantitative holes in performance marketing, some advertisers are seeking to attribute value to “total exposure” rather than pay for specific clicks: paying for exposure across the media mix.
NBC is trying out a metric called “total audience measure”, which tallies TV and online impressions: “you have to understand, every medium has a different effectiveness level”. Beth Comstock, president of NBC Universal Integrated Media

Opportunities for growth companies

The big issue for many start-ups with a revenue-model based on CPA or lead gen is the question of whether the last click before a purchase is the real reason for that purchase being made. I personally believe that the current system is the least-worst mechanism that we have and therefore PRICING WILL STAY THE SAME:  The downward pressure on CPAs that would come from recognition of additional brand building will be netted-off by the overall shift in spending from mass to performance marketing.

It doesn't concern me too much that the last click before a purchase is not the reason why that purchase was made.  Why?  Because a great web app will act as a "noise reduction agent" to cut through the advertising clutter. This is one of the compelling things about Moveme.com (Advent Portfolio company): there is a clear development towards reducing the noise and concentrating on signal strength from publishers.

Affiliate Networks themselves are seeing some questions from advertisers about the true effectiveness of affiliate network campaigns . I have previous posted on this.

All web properties; from small blogs, through growing media-networks (like glam.com) to massively trafficked ad-driven models like Dailymotion will have to continue building bigger and more comprehensive databases of their users: profiles, demographics, likes, dislikes.  Advertiser demand for this data will only grow.

I am also convinced that we’ve not seen enough from companies targeting specific influencers in key communities.  I’m excited about businesses helping advertisers go after influencers in specific niches or providing horizontal tools to go after influencers in multiple verticals.

Finally, the enormous shift away from mass marketing and into analyzing performance marketing and targeting will create fascinating opportunities for growth:
•    Managing customer data-bases
•    Analysing customer data
•    Automating the measurement and performance of advertising dollars on-line and offline

Display ads and CPM are broken

This is the idea that the CPM model is an inadequate measures of performance and therefore their pricing needs to change.

Problem (s)

1) CPM.  We still don't know that when a user sees a display-ad if she is more likely to buy that product. We can run focus groups, we can measure clicks, we can run surveys.  But we don't have any directly correlated and measurability.   This is one of the reasons why I am sure we will see a proportional drop-off in display ads (recession or no recession).

2) Forget consumers, advertise to influencers. 
It is not really display that influences buyers at all.  It is key community influencers. 

Solutions

How are people solving the above problems?

1) Targeting 
When you’re concerned about the veracity of your performance metrics, the obvious way to get around them is to advertise only to be people who you know want to buy.

A range of methods exist:
•    Targeting certain online behavior like Blue Lithium.
•    Targeting specific geographies like Yahoo Smart Ads
•    Targeting specific interest groups
•    Targeting certain communities only at certain times “timing”. E.g. look at Freeads.co.uk weekdays 11.30 – 2pm; it will be dominated by McDonalds ads.

2) Influencing the influencers

Good customers cannot be identified soley by their purchases (see Leveraging user generated content from forrester ).

Some advertisers are beginning to believe that it doesn’t matter if you’re CPMs are wrong, so long as you’re targeting the right people. 

“Now it’s about activating people of influence. They will then promote your brand continually because it protects and extends their personal reputation. People activate based on uniqueness of information, trust and credibility of source. CNET claims to be zeroing in on the 50% of advertising that does work.”

Neil Ashe, CEO CNET . See also "Understanding Influence and Making it Work for You,".

CNET claims to get higher CPM not because their audience are High Net Worth Individuals (like FT.com & Economist does) but because their audience is chock full of influencers.

Forrester have gone one step further by claiming that metrics will focus on the acquisition of  evangelists rather than purchasers.  They predict that a completely new metric will emerge called the cost per acquired advocate (CPPA).

3) WOM agencies

A few specialist word of mouth agencies are emerging specifically to target the influencers.  They are telling brands to allocate their cash to specific users and attempting to knock the bottom out of the CPM market.

Conclusions

There seems to be lots of suspicion today over online performance metrics. A number of developments are trying to solve this including media mix optimization and new targeting techniques.

The concept of effectiveness is core to bridging the online offline shift but arriving at a single measure of effectiveness is a big challenge for the industry.

The commonality for all advertisers is that they want all want a reduction in risk. They want to get better bang for their buck.  They know the web is changing things but it’s still too early to know how and exactly what they should do.

When will be able to use cpa for buying cars?

How do we solve the offline purchase problem?

The Adtech conference a couple of weeks ago was pervaded by two smells. One was the sniff of a slowly decaying traditional advertising world, the other was the smell of adolescent exuberance from a bunch of precocious but brilliant teenagers.

Because of this the conference was brilliant.

What has stuck with me is the cleavage between traditional advertising and new generation performance marketing.

The problem with traditional advertising is that performance metrics are woolly. That’s not to say it doesn’t work.  We still see TV adverts for soap powder because of course there is a correlation between offline ad spend and revenue.

What the traditional admen didn't want to address was what will happen when web offers the same reach as tv. They seemed to retort that ideas like a monkey playing the drums will save offline advertising. I am not so sure.

At one level this is an online offline debate, but on another level this is product centric.

You can sell some products, like cameras online, and so using performance metrics like cpas is easy.

But what sort of performance ads can you use if you're Cadburys or Pringles?

How can you prove an online ad makes more people buy chocolate? Its hard.

Its not just FMCG. For example, what about cars? You can have an incredibly compelling piece of advertising that makes someone more likely to buy a BMW.
But they are going to buy it in a dealer.

Why should it matter that offline ads are hard to measure?

When you can’t measure the effectivness of an ad it should worry admen. Advertisers can get measurement elsewhere. They will go elsewhere.

It also worries small publisher sites; what if you have created a niche car blog with the perfect environment to persuade people to buy cars? You can't currently get the 5% lead-gen fee. But by god that’d be nice.

As an investor I am fascinated by this broken piece of the chain. How do you solve the problem? Vouchers? More sophisticated lead gen intermediaries?

I'm looking forward to entrepreneurs telling me.