DODO (Raphus cucullatus), originally uploaded by happy via.

After fielding a couple questions from interested parties on my prior post, The Consumer’s Media Primer, I wanted to follow up on a particular point.  In that post, I wrote:

Still, there are challenges to the digital ad model. Today, there’s a big ad rate gap in most verticals (information tech media is a significant exception) – the COO of Dow Jones mentioned some time ago that the CPM for print readers of the Wall Street Journal is $75 vs an online CPM of $25 (from a blog post which I can’t seem to locate; if anyone has updated figures, I’d appreciate it). Who knows exactly how this dynamic is going to shake out, but as one of my colleagues likes to point out, the net present value of a customer acquired through different media should converge. That will be punctuative.

So what exactly does the “net present value of an acquired customer” mean?  It’s finance geek speak for the value of a new customer lead minus the cost of bringing that customer in the door.  Smart companies know exactly what a new lead is worth.  They know at what rate a lead converts into a paying customer and know on average how much that customer spends.  In addition, they project, based on historical sales, what residual value the customer holds - i.e. how much will the customer spend in the future? - and discount that value back to today’s dollars (accounting for the opportunity cost of not having those dollars today).  A 3x gap between print and online CPMs should mean:

a) print impressions are 3x more valuable than online impressions - print readers respond 3x more often (more leads), they convert 3x more readily (same number of leads but better conversion), or they buy 3x as much (or some combination thereof),

or

b) the system isn’t rationally priced.

I tend to believe the latter.  One prominent publishing CEO who preferred not to be named told me 10 months ago that he thought the print folks “had a lot of fessing up to do.”  Print ad rates haven’t been held up to the kind of scrutiny that online rates have because the efficacy of print ads is much more difficult to measure. 

Notably, not all advertising is strictly ROI based - there are much more qualitative brand-building exercises, but it’s the qualitatively judged lead generation advertising that’s quickly going the way of the dodo and I think we’re going to see some “fessing up” on the print side.

__________________

Here’s an NPV of an acquired customer example for the intellectually curious:

So let’s say I’m an e-tailer and I pay $20 CPMs which yield customers from 1% of impressions, know on average 1% of my leads convert to sales, the average purchase is $100, and historical data predicts a new purchasing customer tends to buy $100 worth of product again in one year, and again one year later (let’s say for simplicity that these values are net of cost of goods).  From our assumptions, I get 10 leads for $20, or $2 per lead, and 1% of those convert so the expectation is that I must spend $200 to acquire a customer.  The net present value in this example, assuming the customer is making the first purchase today, is (-$200) + $100 + ($100/(1+.10)^1) [$100 rcvd in a year discounted to its value today assuming a 10% discount rate] + ($100/(1+.10)^2) [$100 rcvd in two years discounted to its value today], which = $73.55.

Reality is more complex, particularly as it relates to predicting residual value of the customer after the initial purchase (margins may change, timing of repeat purchase may be all over the map, etc), and if you’re really smart you’re going to factor in word of mouth advertising, which means a customer also holds additional value as a marketing instrument.  Note that many companies expect that their cost of customer acquisition will be less than the gross profit of that first purchase (unlike our example above) - otherwise, one runs into a cash flow problem.  If you’re doing internet marketing, the above should be etched into your metric dashboard.