Possibilities and pitfalls for location-based marketing

As excited as we can get ordering items from internet retailers, it is misleading to think that this virtual world of shopping is the future. John A Quelch and Katherine E Jocz argue that although location is more important than ever, many questions remain for mobile apps

For years, pundits have said that e-commerce presages the death of distance and the demise of place in modern marketing. Nothing could be further from the truth. Even as more and more people go online, they still tend to seek out information, connections, and activities that are close to them. They read news related to their community or country, participate in social networks comprised of friends and family, and buy from local and domestic retailers.

Virtual place has gained dominance over physical place in very few goods and services categories when it comes to the selling process. Software, music, telecommunications, and financial services show the highest percentage of virtual sales because they require no movement of physical product. Yet in 2010 the music industry, one of the hardest hit in the shift away from physical goods, continued to earn half its revenues on physical products sales.

Although sales of e-books are accelerating, online booksellers such as Amazon still deliver more printed books than e-books. All told, in 2010, e-book sales in the United States accounted for under 4% of total book sales by revenue. True, online bookstores can offer enormous choice, but they coexist alongside the local bookstore with its easy browsing, instantly available merchandise, like-minded customers, knowledgeable store personnel, and pleasant ambience.

Moreover, marketing in virtual space for many marketers complements rather than completely replaces physical space. Out of the hundreds of millions of Google queries per day, one out of five searches is related to location. These searches increasingly happen on the go, as mobile phones connect businesses and consumers nonstop.

According to Deloitte and Touche, consumers expect to use mobile to find store locations (55%), research prices (45%), find product information (40%), find discounts and coupons (32%), and make purchases (25%).

Already, adoption of mobile devices far exceeds desktop internet adoption. Globally, there are some six billion cellphones in use. Close to 800 million of these are the rapidly growing category of smartphones possessing web browsers, keyboards, and video capability that operate on Wi-Fi or 3G or 4G networks.

Many standard mobile phones carry an embedded GPS chip that allows network operators to pinpoint the phone’s location. In addition, smartphones allow consumers to see and share location information. Letting location-based mobile apps know where they are allows consumers to search for information relevant to their immediate surroundings. Transportation applications – the time interval until the next train or bus – improve the commuting experience.

Or consumers can ask for the times of movie showings within a given radius. In searching for product information, they can take a picture of an item’s barcode and receive comparative price information for nearby retailers.

new opportunities

Through special apps, users can merge their coordinates with online maps, send their current location to friends, and exchange information about their surroundings. For example, diners can take photos of a restaurant exterior, interior, or menu and upload these to Yelp. Based on geotag data, the imagery is merged with online maps and reviews of the restaurant. Such reviews increasingly make or break the success of restaurants, hotels, and other service businesses.

The new wave of location-based applications is transforming online advertising, consumer information search, and shopping. It opens new creative possibilities for sponsored apps, interactive display ads, and location-based and augmented-reality ads. For instance, toilet-paper company Charmin sponsored a SitOrSquat app that guides users to nearby public restrooms – an incredibly useful tool that builds value for the Charmin brand. AT&T has introduced a location-based advertising service in Chicago and other cities. Triggered by a ‘geofence’ (a virtual electronic boundary), it allows advertisers to beam coupons or other promotional offers to consumers as they enter or leave the vicinity of a store.

Meanwhile, as more consumers upload their location identification to social networking sites like Facebook and Foursquare, these sites will represent desirable platforms for advertisers to target messages to consumers while they’re in particular places.

Industry observer Noah Elkin estimates that around $3 billion will be spent on mobile advertising in the United States by 2013. As with television, advertisers will be able to buy ads by time of day and location – except that the target location will not be as general as a city zip code but, rather, the precise place where potential customers are.

In particular, location-based apps promise to be a versatile marketing tool for local stores. As well as informing potential customers of store locations, operating hours, merchandise lines, and prices, merchants can offer promotions and coupons, tied to time and place, to consumers in the vicinity – meaning that a neighbourhood restaurant, for example, can target people passing within 100 metres of it during the lunch hour.

By asking consumers to opt-in to mobile ads and promotions, merchants can target their best prospects and reduce intrusions on unreceptive consumers. In 2010, McDonald’s tested a promotion on Foursquare in which consumers who ‘checked in’ to certain McDonald’s restaurants could win $5 or $10 gift cards.

Participating restaurants saw a 33% increase in foot traffic and free publicity in local news media.

Mobiles can also serve as loyalty cards. Consumers who check in at a merchant’s location via popular social network sites can collect loyalty points, which are stored on their mobile phones. After collecting a certain number of points, they can earn a badge that gives them a discount or free item. Starbucks, for example, will give holders of a Foursquare ‘mayor’ badge $1 off a frappuccino.

Questions remain

How well local marketing on mobiles will work hinges on some open questions. Currently, the enabling conditions are not quite in place.

First, the security of mobile payment systems must be ironclad.

Second, the interfaces of different mobile platforms vary, such that a single advertisement cannot be delivered to all mobile phones.

"In a virtual landscape, marketers would do well to remember that customers still want the same things they always wanted – trust, convenience of access, information, and interaction"

Third, cookies are not easily applied to mobile phones for addressability purposes, so marketers would have to tap into the clickstreams of data sent between phones and carriers.

Finally, if consumer behaviour data is used as the basis for sending ad messages, European legislators for sure will require an ‘opt in’ by each targeted consumer.

These technical limitations will no doubt be overcome, but equally important, the mobile phone is a very personal device. Traditionally, carriers didn’t allow ads, in part because of concerns about the user experience: a battery rundown, a voice mail or email in-box filled up with ads, or, in the United States, charges incurred for unsolicited incoming calls do not help a company’s image. Mobile advertising also triggers two kinds of privacy risks: intrusiveness (being contacted against one’s will) and confidentiality (how sensitive personal data are handled).

Assuming that mobile advertising will expand, marketers will have to ask permission to communicate if they want to be effective. For example, consumers who have already searched an app related to a particular retailer would likely be more receptive. However, proximity to a merchant, as signalled by a GPS tracker in a mobile phone, hardly means receptivity.

Consumers on the go may prefer fast and simple messages to slower and more complex information, but marketers must steer clear of the junk email syndrome of displaying a similar ad over and over. Search ads should work well because they are user initiated and concise, with deeper information just one click away.

words of caution

It’s likely that much of the mobile traffic – and therefore advertising – will be driven by social networking sites. But marketers should plan for alternative ad strategies if social networking proves to be a fad that fades or appeals to only a few demographic groups.

In addition, hyperlocal geotargeting of consumers may draw the net too closely. Currently, only a small fraction of consumers check in to locations, and this behaviour may never spread widely to the mainstream. Even if it does, advertisers will always need to reach beyond the small group of people who are in a specific establishment at a specific time in order to target a larger group of customers within the general geographic area.

There is no escaping physical location even in the virtual world. The virtual and the physical are intertwined. In a virtual landscape, marketers would do well to remember that customers still want the same things they always wanted in a marketer – trust, convenience of access, information, and interaction – but this need not be seen as a limitation.

As the potential of mobile advertising demonstrates, place-aware innovations around virtual space can create new markets and new ways for marketers and consumers to engage.

From All Business Is Local: Why Place Matters More Than Ever in a Global, Virtual World. Published February 2012 in America and Britain by Portfolio.

John Quelch is dean of the China Europe International Business School

[email protected]

Katherine Jocz is a Massachusetts-based marketing consultant

[email protected]

Featured Image: Virtual place has gained dominance over physical place in very few goods and services categories when it comes to the selling process