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Dr. Dave Goes Full Curmudgeon on "Cost" vs. "Value"

Sometimes (increasingly as I age, it seems) I just get crabby. I lose patience for people in meetings who don’t get to the point. I get frustrated at home when the children question why I ask them to do something. (Just do it! I’m a grown-up and you’re just a kid!) And sometimes I get tired of covering the same old theoretical ground when some blogger/marketer muddies a discussion that I’ve struggled to clarify. Call me a curmudgeon. Call me a misanthrope. Maybe I just need a change of scenery.

Today I read an article supposedly talking about the value of impressions. Yet the article only talks about the cost of impressions. Have we grown so slovenly in our language that we use the terms interchangeably?

Cost is one thing:

Cost refers to how much one must pay for something. Value represents what it is worth. Am I just being a jerk by stating that they are two entirely different concepts? Cost is driven (at least traditionally) by exposure. Putting your message on a billboard along I-94 costs more than one on Beloit Road because more people see it. But the cost per impression for billboards is relatively constant because most people experience billboards in the same way – they look at them as they drive past.

Radio costs $.50 per impression because only one sense is involved (audition). Print involves vision (which is a bit richer) and costs $.75 per impression. TV can use both senses and costs more ($1.80). All this makes sense, and the advertising marketplace has determined the relative fair-market cost for each channel based on its exposure and communication potential. But it’s just THE COST, not the value.

Value is another:

Value (for businesses, anyway) is rooted in the ability to make money. And each business generates money in their own way, usually by having a customer, who pays for goods or services. So value comes from customers, not impressions.The only way to assess the value of an impression is to determine the likelihood of that impression resulting in someone becoming a customer.

Most companies have ways of figuring out how much money they’ll make off each of their customers. They call it Lifetime Value of a Customer (LTV) or Lifetime Profit (LTP), and the number is specific to that company and the relationship they typically have with their customer. LTV takes into consideration how long someone remains a customer (6 months? 5 years? 30 years?), how many transactions usually occur during that time and how much revenue is generated by the company during each transaction. For example, obviously, Mercedes Benz stands to make more money by creating a new customer than does Wrigley gum. It’s just the nature of their business models.

Let's put them together.

Let’s imagine a perfect impression - one that will certainly lead to conversion of a customer. If someone sees it, there is 100% certainty that they will become a customer. A local billboard company has a cost per impression (CPI) of $1.00. Now imagine that a marketer from Mercedes buys some impressions in the form of a billboard, and that the LTV for a Mercedes customer is $1,000 (MB makes $1,000 on every car it sells). Note that while the cost per impression is $1, but since these impressions are perfect and every one results in a sale, the value of each impression is $1,000. A Wrigley marketer makes the same billboard buy and pays the same cost ($1). But the LTV of a chewing gum customer is much lower ($3?), so the value is much lower as well ($3).

Of course any impression’s ability to produce a sale depends on many factors: persuasiveness, creative execution, whether there’s a call-to-action, etc. But the point is that the value of an impression is tied to the underlying business model of the marketer and the impression’s ability to convert. The cost of the impression is just what the market will bear for the exposure (the opportunity to convey the message).

Hope this makes at least a little sense.

In the meantime, “Hey! You kids! Get off my lawn!”

Dr. Dave is GMR's VP Insights & Analytics. He holds a Doctorate in Cognitive Psychology and a Master's Degree in Experimental Psychology – a combination that provides special perspective on the processes underlying marketing, plus best-in-class research design and analysis. With Dave leading the way, we've developed a proprietary ROI framework that measures the true impact of event marketing on consumer behavior.

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