Visitors to Lakeside shopping centre last weekend could have been forgiven for thinking that young people spend their lives messaging each other on their mobile phones and racing around shopping centres like lunatics.

While this may be true of most of them, the majority of those behaving in this manner last weekend at Lakeside were taking part in the world's first trial of location-sensitive mobile phone advertising. The service, called ZagMe, has begun trials at Lakeside, and plans are afoot to extend it to Bluewater in January, and to other shopping malls and busy high streets as it takes off. The hope is that ZagMe will have registered 50,000 users when trials end in January.

About 150 retailers - or 75% of outlets - at Lakeside, including Pizza Hut, Debenhams, The Gap, Argos and Top Shop, have signed up to take part. Retailers send ZagMe a regular number of store promotions to be logged into a database and "broadcast" at the appropriate times to the appropriate demographic, split by age and gender.

Promotions are aimed at driving consumers into shops with special offers that expire after a certain period. The ads are location-sensitive, meaning they are designed to appeal to people who are close to a retail outlet and like to act on impulse. An example could be Virgin Megastore sending a message telling people that the first 20 to give a certain ZagMe code to staff will get free or discounted CDs.

So far so good. The service is achieving what it set out to do - creating a ruckus among retailers and shop assistants alike and whipping up consumers into a frenzy. Already more than 2,000 people have signed up to use the service, pulled in by field marketers at Lakeside or word of mouth from friends, who get loyalty points for recommending new users.

With retailers desperate to give consumers an incentive to go back into shops after the recession of the past few years, ZagMe could be the solution. While it's still early days, the results have been an eye-opener. Bill Green, chief executive officer of ZagMe, says the service has done wonders for British reserve, with shoppers taken over by greed, unabashed about racing around Lakeside shopping centre screaming loudly. Green cites as an example an offer ZagMe ran on Wednesday which, in his words, practically caused a riot. Messages were sent to consumers to say they could get free CDs if they hot-footed it to the ZagMe stand and shouted at the top of their lungs.

Reebok has already discovered that random text messages to nearby people has the potential to create essential footfall into shops. Even if the said retailer is running a promotion as a loss-leader - by giving away a pair of trainers - it achieves the aim of getting customers into the store, where it can then bombard them with special offers. A spokesperson for Reebok says there are already signs that this could become a key marketing tool: "The fit with the ZagMe audience and the brand is perfect as they're precisely the target market and age group that we want to reach."

Last Saturday, the first real shopping day of the trial, Reebok saw first-hand the potential of ZagMe when it ran the free trainers promotion to the first person to get to the store with the ZagMe message. In four minutes, more than 50 people had sprinted through the door, only to be told they'd have to be faster next time.

Jackie Clarke, assistant manager at New Look, which has been offering 10% off all products via ZagMe, says the response has been promising. She could see it taking off, and thought the fit between New Look customers and the age range of ZagMe users was strong. "I'm sure we're going to be running lots more promotions," she says.

After less than a week of service, ZagMe has already learnt a lot about its consumers and how they want to use the service. Green says the way in which shoppers interact with ZagMe is already developing. For instance when they arrive at Lakeside, they are encouraged to send ZagMe a simple message ("LAK4", for example, to mean "I'll be at Lakeside for the next four hours"), or leave a voice message to activate the service. Instead, says Green, consumers have started treating ZagMe like a friend and sending personal text messages. One example is "Zag Me baby for the next 6 hours".

ZagMe is delighted with this, believing it shows that people think the service is fun and feel comfortable with it and the brand as a whole. Another early perception is that consumers have started to view ZagMe as a shopping agent, something to help them hunt down bargains.

Also likely to be tweaked are the messages sent to shoppers as some have started sending messages such as: "I'm in McDonald's, have you got anything for me?", which is effectively a "pull" rather than a "push" service. Green says there are plans to beef up that side of the service and encourage consumers to ask for offers to make ZagMe even more personalised.

Those worried about being inundated with messages from retailers clogging up their phone inboxes can rest easy, adds Green, as ZagMe promises not to send more than two messages an hour, unless users opt to change their preferences and agree to receive more. Accounts can be managed via a soon-to-launch website, zagme.com, and Zagpoints - points collected when signing up, referring new users and receiving messages - can be redeemed for pre-pay phone or store vouchers.

Given that the penetration of mobile phones in the UK is now reaching 58%, and that 18- to 24-year-olds send an average of 10 SMS messages a day, it is no surprise that marketers are waking up to the potential of SMS marketing.

According to a recent survey from Ericsson and mobile marketing specialist Mediatude, mobile phone- users are receptive to the idea of ads on their phones if they're getting something in return. It doesn't have to be much. The Ericsson survey pushed ads to participants who, in return, were merely given free text messaging. The results were encouraging: almost 40% found the ads compelling, and 20% asked for more information after viewing the ads.

So is ZagMe just another flash-in- the-pan gimmick? Not according to retailers who, understandably, are happy that for once they are not being cut out of the equation because of a new piece of technology.

The fact that Carphone Warehouse is one of the main backers of Spotflash, the start-up behind ZagMe, with a 20% stake, and the company raised £1.9m in the summer in seed funding, should mean that the service is not just a fly-by-night trial that never makes it to a national roll-out.

Green, a 36-year-old Canadian and former partner at Andersen Consulting who set up the company last year, says he is blown away by the response. "It's way ahead of expectations. People love it and retailers are enjoying it as they've already seen it's a powerful mechanism to channel people into stores with simple loss-leaders," he says. "We haven't even had the viral effect kick in yet."

With Christmas just around the corner and retailers at Lakeside bracing themselves for riots, ZagMe is going to have a busy few months.