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Are low CPCs the new normal for mobile advertising?

With mobile ad rates consistently lower than on desktop ? even as mobile customer bases grow ? the industry is increasingly concerned about when and even if CPCs will ever start to increase.

Low ad rates in mobile are threatening the ability of companies such as Google and Facebook to generate revenue as they experience dramatic growth in mobile use but are unable to monetize mobile at the same level as desktop. While mobile rates are expected start to rise as several market forces fall into place, for the next year or so, low CPCs are likely to be the new normal.

?We are talking about major market forces ? it is no means going to be a quick transition,? said Michael Boland, program director of the mobile local media practice at BIA/Kelsey, Chantilly, VA

?Rates should start to come up no earlier than a year from now,? he said.

?In some cases where location targeting is very endemic, we will see ad rates that are higher in mobile when ads use native capabilities, but this will only be for some brands and in some cases.?

The incredible shrinking ad
Industry estimates put smartphone cost per click rates at around 60 percent of desktop rates, although in some cases desktop CPCs can be as much as four times higher than mobile. Tablet CPC rates are much closer to desktop although still slightly lower.

Mobile display ads are reportedly lower by a half to two-thirds compared to desktop.

One reason for the lower rates in mobile is that ads are typically shrunk down versions of desktop ads and do not take advantage of the unique capabilities offered by mobile. As a result, they do not attract the same engagement levels, which leads to lower rates.

Many expect mobile ad rates to increase as marketers gain a better grasp of what communication strategies work best in the new medium and develop ad units that fit the mobile user?s needs.

?In order for CPCs to increase, conversion rates need to increase,? said Frank Weishaupt, chief operating officer at Jumptap, Cambridge, MA. ?Additionally, ROI for the advertiser needs to continue to increase as we experiment with new tactics to reach audiences with the right offer.

?Ad relevancy, size and location within an app or mobile site impact conversion rates,? he said. ?When these three factors improve, so will conversion rates, and consequently, CPC rates.?

Contextual targeting
Marketers are beginning to gain a better understanding of how to use contextual targeting in mobile to reach a specific users and a time and place when they are most likely to take an action. By targeting the right people in the right place and time, this can drive the value of mobile clicks.

Additionally, mobile calls to action are becoming clearer and more consistent.

?The objective of the mobile ad is changing,? said Ken Madden, executive vice president and head of digital in North American for OgilvyAction, New York. ?With mobile, the user is closer to the potential purchase transaction, whether through direct mCommerce or drive to traditional retail.

?The combination of that proximity, targeting and call to action will drive the CPC higher for mobile or lower for desktop,? he said. ?Either way, mobile advertising will be at the center of any strong activation campaign.?

Another challenge in mobile has been a lack metrics that marketers can use to determine the return on investment for their mobile efforts.

Supply and demand
Still another reason for the low rates is that there is an oversupply of inventory and low demand from advertisers. However, advertiser demand is expected to continue to grow as more of a focus is put on building ad campaigns that make use of mobile?s unique advantages and the metrics improve.

?Right now, there is an oversupply of inventory,? said BIA/Kelsey?s Mr. Boland. ?That trend is going to turn around and as advertisers? demand levels pick up, we will see a resurgence of ad rates.

?Mobile?s performance has the potential to be so much higher if marketers build campaigns around measuring the higher degrees of performance in ? that could bring rates up,? he said.

Demand for mobile ad inventory is already increasing as major brands funnel a greater share of their overall marketing budgets to mobile. For example, Kraft recently said it will begin allocating 10 percent of its budget to mobile.

However, many brands are still only experimenting in mobile or not there at all ? something that is expected to change over the coming year as more marketers wake up to the potential in mobile.

?The demand is increasing at a very rapid rate, which increases competition for consumers and drives rates upward,? said Jumptap?s Mr. Weishaupt.

?Additionally, the optimization tools and targeting capabilities are evolving, which makes the campaign much more efficient and effective,? he said.

Final Take
Chantal Tode is associate editor on Mobile Marketer, New York/>