How to use rewarded advertising to acquire good users at scale.

Attention is a scarce resource. Good advertising transforms this resource into interest, sales and profit for a business.

But attention can be expensive. In a bid to grab it, more than $200 billion is spent each year by advertisers in the United States alone. Indeed, competition for attention has grown so drastically that the cost of advertising has multiplied over seven times in the last thirty years. To effectively speak to an audience, advertisers need to stand out in an increasingly crowded, noisy market.

Rewarded advertising, also known as value-exchange or incentivized advertising, can help advertisers stand out. This type of advertising provides audiences with rewards in exchange for their engagement. While non-rewarded advertising pushes a message to an audience, rewarded advertising asks the audience to opt-in to interacting with the advertisement. In a noisy and highly competitive market, it is extremely valuable to be able to access a consistent supply of people who are choosing to engage and pay attention to advertisements.

So, what are different types of rewarded advertisements and what role should they play in the marketing mix?

What are rewarded advertisements?

The rewarded advertising industry started with the offer wall. Widely used within mobile games, offer walls show an audience a list of different rewards. Each reward is designed to enhance gameplay, such as virtual currency or an extra life. The audience can choose to gain these rewards in exchange for completing advertised actions like installing an app or completing a survey. The harder the action, the larger the reward.

While the industry started with the offer wall, rewarded video has become its focal advertising unit. Like offer walls, they are also widely used in mobile games; in fact, according to one industry survey, 75% of mobile games show rewarded videos to its users. However, unlike offer walls, the audience receives rewards in exchange for viewing videos, rather than installing an app or completing another action.

Offer walls and rewarded videos can both add value to a marketing plan; however, they should be managed very differently and play very different roles in the marketing mix.

What is the role of the offer wall?

The key strength of an offer wall lies in its ability to move a large audience quickly through the marketing funnel. A person acquired through an offer wall can move from becoming aware of the product to using the product in a matter of minutes.

In its ability to move an audience through the marketing funnel quickly, offer wall advertising has many similarities to search advertising. However, while search advertising ensures speed by educating an audience that is already searching for and interested in a solution, offer walls do so by incentivizing the audience. As offer walls do not require the audience to first identify a problem or need and then search for a solution before showing an advertisement, an offer wall advertisement can speak to a much larger audience than search advertising.

On the other hand, people who use a product in exchange for a reward are not intrinsically interested in the product. As a result, growth in the number of new users can be just a vanity metric, as these users churn quickly. While offer walls can effectively generate awareness and new users, retention is a fundamental issue. The lifetime value of users acquired through offer walls is generally much lower than those acquired through other advertising formats.

Effectiveness of offer wall advertising vs. search advertising at different stages of marketing funnel

Therefore, the role of offer wall advertising is to rapidly acquire new users at a low cost and radically improve the efficiency of user acquisition. However, the low retention of users means that offer walls are also a very challenging format. To ensure they add value, the quality of new users acquired through offer walls must be closely managed. This requires advertisers to calculate the lifetime value of new users and then implement tactics to increase their lifetime value.

How should offer walls be managed?

A user’s lifetime value is the amount of profit an advertiser is expected to generate from a user, for the time they remain a user. While an advertiser may understand the lifetime value of the average user, it is critical to understand the value of users acquired through different advertising channels and formats. This includes the lifetime value of users acquired through offer walls.

How to calculate lifetime value

When calculating lifetime value of users generated through an entirely new advertising channel or format, there may be an absence of historical data. Without history, it is difficult to estimate the churn rate or even profit of a new user acquired through a new channel.

Instead, lifetime value can be estimated by using a new user’s attributes and early behaviors to predict their future behavior. For example, attributes like geography can predict value; a user from Seattle may have a different value than one from New York. Early user behavior can also predict value. For instance, Facebook users who friended multiple people in the first few days after joining ended up being much more valuable than users who friended few people.

Once the lifetime value of a user acquired through an offer wall can be estimated, then it is possible to compare the efficiency of an offer wall to other advertising channels. Comparisons can be made by examining the ratio of a user’s lifetime value to their acquisition cost. This ratio is known as the lifetime value / customer acquisition cost (LTV/CAC) ratio.

If users acquired through an offer wall have a higher LTV/CAC ratio than other advertising channels, then it is an efficient way to spend advertising dollars. This is true, even if users have a lower absolute LTV than other sources. In the example below, even though users acquired through the offer wall have a lower LTV than other advertisements, they also have a lower CAC and a higher LTV/CAC ratio. More value is generated for the business per dollar spent on an offer wall than any other advertisement. If the LTV/CAC ratio of a new user acquired from the offer wall is lower than alternatives, then the CAC can be reduced until the ratio is efficient.

Example — LTV/CAC ratio of different advertisements

Advertisers can place rewards on multiple offer walls across several publishers (like mobile game publishers) at the same time. This means that the value of a user acquired through an offer wall at one publisher may be higher than a user acquired through another publisher. By comparing the LTV/CAC ratio of users acquired through different publishers, advertisers can also optimize the CAC per publisher to make sure each advertising dollar is spent most efficiently.

What is the role of rewarded videos?

While the role of an offer wall is to quickly and cheaply acquire new users, the role of rewarded video is to create awareness and interest in a product among a highly engaged audience. It is much more of a top of funnel marketing channel. By creating awareness and interest, rewarded videos should help a product organically acquire new users in the future; indeed, it can even build advertisers’ brand equity among existing users, driving retention.

Effectiveness of rewarded video at different stages of the marketing funnel

The high level of audience engagement is a direct result of the opt-in nature of this advertising format. While only 20% of an audience may view an entire non-rewarded video advertisement, this rate is often as high as 85% for rewarded videos. As the audience of rewarded videos are incentivized to finish viewing the video, rather than perform any further actions, new users acquired from rewarded videos will still be intrinsically interested in the product. As a result, retention will be high.

Accessing this kind of engaged audience can be expensive; in fact, rewarded videos are often more expensive than non-rewarded videos. Therefore, rewarded videos must also be carefully managed to ensure that they are an efficient use of advertising money. Careful management requires advertisers to understand the actual cost of rewarded advertising and design creative content that drives the audience’s interest and eventual use of the product.

How should rewarded videos be managed?

To know the actual cost of rewarded advertising, it is important to not only look at those users who are acquired directly from clicking on the advertisement. It is also important to factor in the new users that are organically acquired as a result of the advertisement. This is often called the organic uplift. Estimating the organic uplift requires advertisers to identify the baseline level of organic acquisitions that would occur without the advertising expense. Deviations from this baseline can be classed as the uplift.

Once the organic uplift is estimated, then it is possible to understand the actual efficiency of rewarded video and easily compare its LTV/CAC ratio with other advertising formats. In the example below, organic acquisition grew by 20% once rewarded video advertisements were deployed. When calculating CAC, the total spent on rewarded videos should therefore be divided by the users acquired directly through the rewarded video plus the organic uplift.

If $150 were spent per day to acquire 40 new users in the example below, then the CAC would be $3.75. However, if the 20 additional users acquired through organic uplift were also factored into the calculation, then $150 would be spent on acquiring 60 users and the CAC would be $2.50. Factoring in organic uplift means the advertising channel is 33% more effective.

Example — new users over time, organic and rewarded video

Aside from effectively estimating organic uplift, rewarded video also requires the advertiser to create a video advertisement that makes the audience interested in the product and eventually want to use the product. There are many great videos in the market and it is a competitive advertising format. The ability to leverage rewarded video hinges on the strength of the video.

Producing them requires more creative management than search advertising or offer wall advertising. However, fundamentally, the advertiser must understand the target audience and speak to them with a compelling message that explains the value of the product. Rather than focus on creativity, an advertisement should focus on the strength of the message. Function is more important than form. As the advertising pioneer Ogilvy said, “When I write an advertisement, I don’t want you to tell me that you find it creative. I want you to find it so interesting that you buy the product”.

Interested in business, technology, politics and their intersection.

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