Offer provider TrialPay is launching a new product today that enables game publishers to monetize social currency offerings, called DealSpot. The new product essentially allows games to offer exclusive deals to game players within a game, as opposed to the offers appearing in a separate game outside of the game (often called the ‘offer wall’).

The company is partnering with Groupon, Tippr and Living Social for local deals, LOVEFiLM for subscription entertainment, branded retailers such as Yves Rocher and Lancôme for shopping, Rue La La and Mertado for flash sales and more. Deals automatically appear in games and prompt a user to click on the link to receive the exclusive deal to earn virtual currency.

DealSpot has been running in private beta on Playdom’s Sorority Life, Playfish’s Restaurant City and iWin’s Family Feud. And TrialPay allows publishers to offer the deals based on player performance. For example, iWin will use DealSpot to display special promotions to players who have reached certain levels in Family Feud. Another example of an implementation took place within Playdom’s Sorority Life campaign, which rewarded players who purchased a Groupon for $25 off a $50 purchase at Gap also received with the game’s “Brownie Points.”

TrialPay received a big vote of confidence when Facebook selected the offer provider to power in-game and shopping offers for Facebook Credits. Peanut Labs, which was recently acquired, was also used by Facebook for its offers initiative. And Peanut Labs has its own deal-focused offer product, called Cherry Deals.

In an open letter to be published later today, Offerpal CEO George Garrick talks about the reasons behind the downsizing, and the company’s new focus on other platforms:

As most of you probably know, Facebook has launched Facebook Credits, and certain Facebook games and applications have or will transition from their proprietary currencies to FB Credits.

Facebook has indicated to us that at least initially they have selected another provider to be their alt-pay partner for purchases of Facebook Credits. We respect this decision, maintain a good working relationship with Facebook, and will do our best to facilitate the smoothest possible transition for those games which move to the Credits system. However, this means that for the applications we currently serve which do switch to Credits, once that change happens the user traffic to those games that originates from Facebook will no longer be served by Offerpal.

We will continue to fully support Facebook applications which do not switch to Credits, we will as I mentioned do our best to ensure the smoothest possible transition for those applications which do switch, and we will continue to serve our valued developer partners on other Internet platforms and destination sites as well as on mobile platforms.

But like any good business, we must balance our costs with our revenues by business area. This means that we must downsize our Facebook operations in order to adjust to an anticipated lower scale of Facebook user traffic, while we also re-focus our resources on our growth areas including other gaming platforms, open web gaming, new Internet verticals, and most importantly mobile through our Tapjoy subsidiary.

Unfortunately, as a result of this, some of the outstanding people who have worked tirelessly over the last couple of years to monetize Facebook games will have their positions at Offerpal eliminated. I thank them for their dedication, effort and contribution, and will do whatever I can to help them find exciting new career opportunities.

Meanwhile, Offerpal is currently the largest offers and alt-pay provider world-wide. Offerpal’s business continues to grow and expand in numerous other areas including an exciting new agreement with Yahoo!, and on the mobile iPhone, iPad and Android platforms, with more to come. We are projecting continued strong growth going forward as well as sustained profitability.

Finally, we would like to thank our 2,000+ developer partners for their continuing support of Offerpal and we look forward to continuing to work with all of you as we collectively grow our exciting new industry.

In other words, Facebook is no longer restricting its Offers experiment to just games. We’ve confirmed that Facebook is currently testing this broader implementation of Offers, though it is currently only being shown to some users.

Offers allow users to ‘earn’ virtual currency without paying for it directly — for example, you get a bonus of 220 Facebook Credits for signing up for Netflix, or 85 credits for signing up for the latest Groupon deal — and they’ve proven to be very popular among app developers.

But Offers have also been a touchy subject for Facebook. Facebook is only now entering the arena itself, but Offers have long been available through an array of third parties, some of whom were tempting users with scammy deals from less-than-reputable sources. The problem reached a head during our 20+ post series on Scamville. Since then Facebook has cracked down on the bad players and the big names have cleaned up their act.

There’s too much money on the table for Facebook to ban Offers entirely, which is why the company is working with TrialPay and Peanut Labs to only promote its own line of officially-sanctioned promotions, all of which are from trusted brands.

Mothers Day represents a huge gift giving market, second only to the holiday season. Last year lone, $14.1 billion was spent on Mother’s Day-related gifts. In the week leading up to Mother’s Day, about $1 million per day was generated by “gifts for mom” promotions that paired offers from online flower merchants like 1-800-Flowers with free in-game virtual goods and currency. According to TrialPay, social game publishers running Mother’s Day campaigns saw five-fold increase in offer-based revenue, which generally accounts for 15-20% of a social game’s total revenue.

Visitor conversion rates more than doubled during Mother’s Day (player-to-payer conversions). And 40% of consumers were first-time buyers that had never made a purchase through a game.

TrialPay Facebook-focused offers platform is used by a number of big-name social game publishers including Playfish and Playdom. In fact, Facebook recently announced its foray in the offers game, and partnered with TrialPay to use their offers in the test round. Clearly, there’s a lot of money in the offers space and Facebook wants a piece of the pie.

They’re starting things off very carefully with offers only from TrialPay and Peanut Labs, who are known for being the cleanest of the clean when it comes to offers (read this guest post by TrialPay CEO Alex Rampell).

More details at InsideFacebook. I don’t expect we’ll see the really scammy stuff like mobile subscriptions and Video Professor pop up on Facebook directly. But I would expect them to broaden the offer providers over time to guys like Offerpal and SuperRewards, who have been much more aggressive about monetization in the past.

Either way though, we suspect that Facebook is taking the lion’s share of revenue from the offer providers, which means that even when they work with the providers there isn’t much revenue in it for them. Over time It may just make more sense for Facebook to go direct, maybe by buying one of the offer providers, and then cut everyone else out.

Alex believes that the recent coverage about the dangers of advertisements and advertising in the social gaming space is a welcome debate that may help save this industry from what this insider sees as the social gaming equivalent of the “tragedy of the commons,” where all constituents – users, advertisers, offer providers, and app developers – could permanently lose. The recent Zynga, RockYou, and MySpace announcements are an encouraging first step, but more needs to happen.

Unconstrained Markets Can Create Harmful Advertisers

In an efficient ad marketplace, the top keyword usually goes to whoever can spend the most money on it, normalized for conversion. Who can afford to spend the most money? Unfortunately, it’s not always the company with the best product, service, or price; under pure laissez faire advertising, it can be the company that tricks, lies, and steals more pennies out of each customer than any competitor. This often forces ethical competitors to make a very tough choice: roll over and stagnate (or die), or play a similar game. Playing to win means staying microscopically behind the red line or breaking the rules and not getting caught.

Let’s keep that as the backdrop as I tell a sordid story about lead generation on the Internet.

Offers Can Be Done Well and Benefit Everyone

First, “offers” and “incentives” don’t have to be dirty words, and when used properly provide consumers better value. Four quick examples:

1. You’re buying a new phone, say a Blackberry. You get the Blackberry for free if you agree to a 2 year contract with Verizon, but it’s at your option. You get a better price (free, if you’re OK being locked into Verizon), Verizon gets a guaranteed customer, and RIM sells another Blackberry.
2. You need to buy flowers for Valentine’s Day. You’d normally just search for “flowers” on Google, but you happen to already be on McAfee’s website evaluating anti-virus software. You see that you can get McAfee AntiVirus for free if you buy your flowers from FTD, so you shop at FTD. You get McAfee software for free, McAfee gets paid by FTD, and FTD gets a new customer.
3. You get $30 off your order at Amazon.com if you sign up for a (free) Amazon.com Visa card. Amazon gets a higher order since you spend more, Chase gets a new customer, and you get a better value.
4. You have $20 in your shopping cart at Amazon and you are offered free shipping if you spend another $5, so you buy another book and get free shipping.

These real examples work very well for all parties, all of them can be and have been extended to social games, and it would be hard to argue that they are not legitimate. The problem is that they are crowded out by less legitimate alternatives that are proliferating today, a theme which Michael nailed in his last post. Incentive marketing can be a disaster if not done right, though, and the “win-win-win” can turn into “lose-lose-lose.”

Two Examples of Getting It Right In Social Gaming

Example Screenshot: Remember Amazon.com’s free shipping if you spend over $25? No such thing as shipping in online games, but Restaurant City, one of the leading Playfish games with over 17M monthly active users has offered customers a free movie ticket to anyone who selects the $39.99 option

Example Screenshot: PetSociety, Playfish’s most popular title with over 21M monthly active users, enables customers to purchase flowers from FTD during Valentine’s Day and receive 8,000 coins toward their account.

Historically, Offers Have Been Implemented Poorly

Consumers Scamming Advertisers – Cash For Clunkers: Back in the late 90’s and even after the bubble burst, a lot of companies offered you “cash” for signing up for offers (like Blockbuster, Vonage, etc). Netflip (aka MetaReward) scaled to nearly $70M in revenue before being shut down by its acquirer, Experian. The reason? The lead quality was bad – no, atrocious. At one point in 2006, Earthlink was paying $200 to acquire a customer for its moribund dialup business. “Cash back” sites would offer consumers $100 to sign up for a $20/month service, which said consumers would summarily cancel, netting the cash back site a $100 profit and Earthlink a $200 loss. Result: Consumers scammed advertisers, and advertisers ran for the hills, but it took years for this to happen and the ecosystem to devolve.

Advertisers Scamming Consumers – Free iPods: A few years later, and fueled by cheap media, “Free iPods” (often referred to as “Free iPod Scams” and later encompassing “Free [product X]”) grew to over a half billion dollar/year industry. It was a pure breakage model; your iPod would be delivered, but only if you got through dozens of pages of co-registration advertisements and offers. It got scammier and scammier since barriers to entry were low, and whoever scammed customers the most received the most revenue to get more customers. Everyone went along for the ride because every website and ad network benefited in the form of more “free iPod” advertisements. Eventually, the FTC came in. Result: Consumers got scammed, and legitimate advertisers ran for the hills, but this too took years.

Social Gaming Today: Offers Still Done Poorly, But With Hope?

Now it’s 2009 and the age of social networking. Replace “free iPod” with “free virtual currency” and see if you can figure out how this story could end. It’s actually worse because every time a consumer signs up for another offer, he or she earns more currency – yet by the 100th offer, the chance of lead quality being high for non-shopping offers (e.g., Gap, BestBuy, Target, etc) is infinitesimal; somebody who immediately signs up for both Netflix and Blockbuster to earn coins will probably be a bad customer for both. Returning to the “tragedy of the commons,” the network (or app developer) with a conscience for quality who won’t let consumers do 100 untargeted offers will simply be out-monetized by the network/developer who will, and that hurts the long term prosperity of everyone.

Many legitimate advertisers have already started to cut their payouts or bail, such that the “scammy” offers yield the highest returns. Many app developers don’t want to run scammy offers but don’t have a choice if they are to stay competitive in another tragedy of the commons.

Where Are the Complaints?

There’s also a large obfuscation layer between the user and the advertiser. It often looks like this:

User->App Developer->”Offer Provider” X->Ad Network Y->Advertiser

The offer providers are companies like Offerpal, SuperRewards, DoubleDing, Gambit, Firecue, GratisPay, and to some extent my own TrialPay, and ad networks are companies like Adteractive, CPAStorm, SearchCactus, Gratis Internet, ClickBooth, Affiliate.com, etc. The app developers often rotate different offer providers, and the offer providers often rotate different ad networks, even though the user at the beginning and the advertiser at the end stay constant. This makes it easier for users to scam advertisers, harder for offer providers to correctly track completions (there are more links in the chain to break – many people sign up for offers and are not “credited”), and easier for scammy offers to keep resurfacing such that the game publishers don’t always know what’s going on. It’s the price they pay for higher short term revenue.

Moreover, user complaints are often directed at the advertiser since the offer provider and ad network are relatively invisible in this chain, which is why you’ll hear many app developers and offer providers claim they get no complaints even though scammy offers collectively yield tens of thousands of complaints to various attorneys general, the FTC, and internet message boards. Despite this clever obfuscation, it’s still bad for the game publisher; users have less money to spend directly (since they had a chunk of change “scammed” away), and ill-will is bred towards the game publisher.

To Prevent Further Damage, Here’s What Needs to Happen

It doesn’t have to end this way – there are numerous legitimate forms of incentive marketing (see my initial four examples), but they’re not as profitable on a short term basis as allowing users to scam advertisers 100 times, or allowing advertisers to scam users several times (even the most naïve users get the hint after a few interactions). This has been tough for my company because we’ve felt the only way for us to “win” was not to play the game, and focus on higher quality and sustainability. That’s ok because only a small fraction of our revenue comes from social gaming, so we aren’t desperate to monetize at any cost, but I’d hate to see the industry implode.

So how do we emerge from this sad state of affairs?

1. Market forces (hopefully). It’s about quality and not quantity. At some point, there may be an inflection point where the “legitimate” offers (shop at Gap, shop at BestBuy, etc), shown ONLY to the “legitimate” users, actually outperform scamming by users or scamming of users. This is because a disciplined approach yields higher quality, and advertisers reward higher quality with higher payouts. One reason why QuinStreet, a leading performance advertising company, beat its competition over the past decade was because it focused on the quality of its leads.
2. Regulation (hopefully). Facebook cracks the whip and bans app developers who show scammy offers. I think most app developers would welcome this regulation as they don’t like this stuff but have no choice if their competitors do it.

Actions Needed Today

The solution is a mixture of both. Having Facebook crack the whip does nothing to solve the problem of users scamming advertisers, which imperils the whole ecosystem. Indeed, we work with companies like McAfee and Skype, assiduously measure our quality because we work directly with the vast majority of our advertisers, and we have seen the tremendous volume (and often abysmal quality) of incentivized social gaming traffic sour some advertisers to the point of throwing the baby out with the proverbial bathwater.

The problem is similar to click fraud in search engine marketing, and the solution is similar:

Advertiser Feedback Loops: Offer providers need to establish direct relationships with advertisers and create a quality feedback loop. The vast majority of our advertising deals are direct, and we insist on feedback loops (did the user “quick cancel” a trial?) so we can eliminate bad sources of traffic. It doesn’t mean that all of our traffic is perfect, but we spend a tremendous of time eliminating the negative externalities, which provide for better unit economics. App developers who care about quality might even want to consider working directly with advertisers, lest they receive the lowest common denominator of payouts from offer providers who don’t focus on quality.

Limits on Offers: There should be strict limits on what users can sign up for – not by law but by rational self-interest, since this will yield more long term revenue. The vast majority of our “alternative payment” business revolves around letting users pay for an item like McAfee VirusScan by transacting with one and only one advertiser of the user’s choice. This increases the quality, which lets advertisers pay us more, and in turn lets us pay McAfee more. Advertisers will pay more if they recognize that fraud is lower and quality is higher, just like with search engine marketing. Multiple offers can work (e.g., retail shopping at different stores) but it’s much more complex in lead generation.

Game Publishers Should Insist on Long-Term Partnerships: Game publishers who think about long term quality (and don’t swap out providers, where the providers don’t swap out networks) will make more long-term money – partially because they won’t burn as many customers, but primarily because quality breeds higher payouts from advertisers.

Let’s hope we can solve the tragedy of the social gaming commons. Virtual currency is a multi-billion dollar industry growing at a massive rate, and reckless short term behavior can threaten an even more prosperous long term future.

TheBigBundle is a site put together by TrialPay. Basically, they rounded up a bunch of tech companies (and some non-tech ones) and got them to offer some good deals to people who made the donation. So you’ll get things like, a free month subscription to Skype Unlimited, 6 months free of TripIt Pro, $25 off Everynote Premium, a $5 coupon to Threadless, 3 months free of Dropbox Pro, $50 off 23andMe, and a bunch of other stuff.

The goal is to raise $3 million to give to the American Cancer Society (which would be 100,000 bundles). They’ve given themselves until October 14 to reach the goal, so two weeks from today. So far today. in just a few hours, they’ve raised about $3,000.

As with all of these types of things, people often want to know exactly how much of their money is going towards the cause. TrialPay is very transparent about it, listing it on the site:

How much really goes to the American Cancer Society?

Virtually everything. The company putting on this promotion, TrialPay, is making no profit from sales of the bundle, and will be publishing a report at the end to detail the full accounting of the amounts it has collected from sales of the bundle and the amount contributed to the American Cancer Society. We expect that the American Cancer Society will receive a minimum of 70% and a maximum of 98% of your purchase price of the Bundle.

And you can also choose to donate an extra $20, and nearly 100 percent (minus a couple percent for the credit card fee) will go towards the American Cancer Society.

The basic idea behind TrialPay is to give customers something for free on top of an item they are already paying for.

The service provides users with an alternative payment method at 3,000 or so participating merchants. Instead of directly, users are offered something for free (such as free calling minutes on Skype) in return for buying a magazine subscription. Another example – “If a customer isn’t quite sold on a software title, he or she could get that software for free by sending flowers from FTD.com, signing up for Blockbuster Total Access or buying $50 worth of clothes at Gap.com. TrialPay pays for the software using revenue (CPA) from the advertiser, and the customer gets a free license.”

We first covered them at launch in October 2007. Buyers are presented with the alternative options at the time of checkout, so they can choose to just pay as normal or take one of the offers. It’s an easy option for merchants to accept, since they get paid anyway. The question is, will consumers use it enough to make a real business out of it? I’m doubtful, but that’s mostly because we’ve seen a trail of dead bodies who’ve tried to create alternative payment schemes. People seem to like their credit cards just fine, and can smell a marketing gimmick a mile away.

TrialPay says they’re adding 15,000 new registered users per day, though, with 5.2 million total. Maybe people aren’t so good at smelling those gimmicks after all.

The Skype deal is just one example of TrialPlay’s ongoing promotions to help services make some money, while hooking new users and advertisers gain customers from trying something new, while paying for something familiar. The company is working with over 1,500 businesses to let users “pay” for their products by participating in an advertisers program, which range from buying a subscription to the Economist, to trying out anti-wrinkle cream.

While TrialPay CEO Alex Rampell can’t say how much Skype is making off their offers, he did say that “for most of our merchants, we are yielding between 10-100% in incremental revenue. A company like Skype might make $80 on a consumer not willing to buy their $8.85 calling plan”. He went on to say “Skype now yields significant revenue for Staples.com, because people shop at Staples.com in order to get Skype credits for free”. Conceivably, users not willing to buy Skype may be willing to buy enough from Staples to actually generate more revenue than Skype’s purchase price. He made no qualifications about how commonly the over-achieving offers occur, though.

But businesses do have some control over how potentially lucrative the deals are. They can set a minimum acceptable price “MAP” for the revenue generated by offers customers can use to “buy” your product. While it make sense to set the minimum at the price of your good, digital goods can maximize their profits by selling more at a lower price. Regardless of the price, TrialPay always orders the offers in a profit maximizing order based on expected total revenue, with the most lucrative deals at top.