Importance of Analyzing Unit Cost of Engagement in Advertising

Importance of Analyzing Unit Cost of Engagement in Advertising

For publishers, analyzing the unit cost of engagement in advertising identifies revenue optimization opportunities.  In the next few blog entries, I’ll explore why and how to analyze the unit cost of engagement for ad orders.  This first entry in the series addresses the following questions:

  • What is engagement?
  • What is the unit cost of engagement, and how is it calculated?
  • Why is calculating unit cost important?

What is engagement? For advertisers and publishers, engagement is the length of time the audience spends with media and ad.  Engagement is one of the few scarce commodities on the Web.  An audience member’s options for news, entertainment, socializing, purchasing, and learning are exploding, and like it or not even with the mobile explosion, any one person has a limited amount of time to provide on any given day.  A publisher’s success is premised on maximizing its share of audience time (i.e., engagement) and the revenue it produces.

Today, the publisher’s standard for engagement mistakenly measures the page views rather than the length of time.  Using today’s standard, there is no difference between impressions that last 1 second, 10 seconds, or 2 minutes which of course doesn’t make sense.  Research has shown that the longer a person is exposed to a web page containing an advertisement the more likely they are to remember the advertisement.  Additionally, engagement enhances direct response advertising as a recent study published by TidalTV showed click-through rates of targeted ads increase as engagement increases.

What is the unit cost of engagement? Using a length of time as the measure for engagement, the unit price of engagement is simply the price paid by an advertiser for each second an impression is delivered to an audience member.

"Demand Map for Advertising"

How do you calculate it? The simple answer is to take the total revenue of an ad order and divide it by the total length of all impressions delivered as part of the order.  The chart to the right illustrates the unit cost of engagement.  In this chart, two advertisers pay the same $100 CPM rate to a media publisher for the same target audience.  The first advertiser’s order resulted in 5,000 impressions with an average length of 10 seconds each or a rate of $0.01/second.  The second advertiser’s order resulted in 5,000 impressions with an average length of 120 seconds each or a rate of $0.00083/second (12X lower rate for engagement).

Why is calculating unit cost important?    With all other factors equal, research has shown that increased engagement improves ad campaign performance in both direct response and branding.  By calculating the unit cost of engagement for ad orders, publishers can identify which orders were overpriced and which were underpriced.

Overpriced orders have lower engagement per dollar and lower conversion/recall rate per dollar.  Advertisers with overpriced orders are less likely to advertise in the future representing revenue risk (e.g., the first advertiser in the example).  Underpriced orders have higher engagement per dollar and higher conversion/recall rate per dollar.  Advertisers with underpriced orders are more likely to accept a price increase to continue targeting the publisher’s audience (e.g., the second advertiser in the example).

By knowing which audience segments have higher engagement and which advertisers are receiving good value, publishers can price discriminate to optimize their revenues.  In the next post, I’ll cover the quantitative method for establishing the unit cost of engagement.

The New Discipline in the Subscription Economy: Recurring Revenue Management

If you’re a subscription business, the most dramatic effects of trends like cloud computing and mobile won’t be felt in your company’s product line. The real disruption will be to your revenue model. Customers will not pay to own your products. Instead, they expect to pay for the value they receive by using your products. Revenue management is the common approach to solving the challenge of optimizing the revenue model.  Unfortunately, the rules of subscription models render traditional revenue management ineffective.  To manage revenue and profits in this case, companies need a new revenue management process to optimize the revenue model.

What is revenue management?

Revenue management is common practice in the distribution-centric Transaction Economy.  The goal is to maximize revenue and profits by pricing products to match customer demand.  Revenue management is pervasive in such industries as airlines, hotel rooms, surgery, advertising, retail, media and rental cars.  For example, airlines offer a passenger a seat between two cities defined by departure time, legroom, seat width, and associated service.  Because the product, in this case, a seat, is both standardized in terms of customer fulfilment and limited in inventory, the airline can forecast demand at specific prices from different customer segments and manage seat availability to optimize revenue.  The airline can forecast demand for higher-priced seats from business travellers that value last-minute bookings and sell the remaining inventory at a lower price to early purchasing leisure travellers who value cheap travel.  While the business traveller and the leisure traveller sitting next to each other expected the exact same product, each valued the trip differently and consequently paid a different price.  By selling the right standardized, inventory-constrained product to the right customer at the right price, the airline maximizes revenue and profit.

Why can’t traditional revenue management be used in the Subscription Economy?

Unfortunately, distribution-centric revenue management doesn’t work for the consumption-centric subscription business model.  For example, imagine if your cellular provider informed you that all the minutes of data transfer were sold out for the day and you could not buy anymore regardless of the price?!  Or imagine if you wanted to sign up for a subscription and the provider said they were sold out?!  These are principles of the distribution-centric revenue management process.

The revenue management process is different from subscription business models for two reasons as shown in the figure.  The first difference is that customer fulfilment is variable.  While each customer receives a standard subscription agreement, each of them will use the product differently.  Unlike the airline example where the airline defined customer fulfilment (i.e., a seat), in the Subscription Economy, customers define fulfilment based on their individual usage (e.g., amount of texting consumed in a cellular plan).  Customer demand can no longer be determined from purchase data alone.  Customer demand must be measured by usage data and purchase data together.

Second, for subscription business models, there is no limitation in inventory.  In other words, the differentiated value between customer segments cannot be derived simply from product availability (i.e., inventory management).  Unlike airlines that create differentiated value and revenue based on managing inventory of a particular product package (i.e., a seat), in the Subscription Economy, differentiated value and revenue opportunities have to be created by providing differentiated product packaging (e.g., different combinations of minutes, text, and data in a cellular plan).  Rate plan management replaces inventory management for revenue optimization.

These differences highlight why revenue management for subscription business models requires a new approach which the “use it or lose it” dynamic highlights the most. The “use it or lose it” dynamics states if the customer does not use your product at a level that matches the subscription agreement, the customer will cancel the subscription, and you’ll lose the revenue (A complete description of “use it or lose it” can be found here ).  So in the Subscription Economy, managing recurring revenue (i.e., the ability to proactively manage the subscription revenue model) boils down to matching the right rate plan to the right customer usage at the right price.

Why is recurring revenue management required?

Just as revenue management is a well-chronicled competitive advantage in Transaction Economy industries such as airlines, revenue management will be a requirement for …