The Perfect Storm: Response Metrics and Digital TV

John Wanamaker, the father of the department store, described the classic dilemma in advertising: “I know half the money I spend on advertising is wasted, but I can never find out which half.”

Direct marketers have long believed that they have the answer: A blend of sophisticated statistical modeling and elaborate targeting techniques. Yet even they can’t totally solve the wasted-money problem despite response rates of 2%, 5% or even 20%.

Meanwhile, the mass media go to great lengths to demonstrate through audits, surveys and ratings that they have minimized waste in advertising. But their shotgun approach still misses the target or hits the wrong one. (It’s a new meaning for “friendly fire”!)

But there may be a “Perfect Storm” brewing in the industry (as in multiple elements coming together in perfect unison). It combines the effectiveness of direct marketing targeting and the reach of mass media.

Digital cable television offers a unique capability to target individual homes with household-specific, real-time advertising messages. Better yet, marketers can immediately measure the impact of these ads. Three of the elements necessary for this perfect storm have converged.

1. Technology to transmit household-specific advertising.

2. Knowledge of the characteristics of the best households to reach.

3. Information (data) about each household in order the trigger the technology to deliver that household.

Up until recently, there was no technology capable to provide this. Now, through companies like Visible World, companies can send separate messages to each home.

And the knowledge element? Companies can garner this through large scale product/media surveys by MRI, Simmons, and other research firms, and couple this with household modeling. The final aspect can be met through large compiled lists capable of scoring each household for its likelihood to buy a product or brand.

Here is how the system could work:

*An advertiser would seek to reach the best possible target for selling a service or product.

*The ad agency would access a PC-based knowledge tool that allows it to determine the most precise reachable target audience definitions for the advertiser. This tool would link media usage, product and brand usage with demographic, socio-economic and other data applicable to the full universe of cable households.

*Once the target is defined, each household on the cable system subscriber file would be scored with enhanced data to determine which households should receive the targeted message.

*The cable system would insert ads in the appropriate programs targeting only the specific household which should receive the ad.

*Once the ad has been distributed, actual reception by “sets in use” can be reported back to the agency and advertiser.

Let’s look at a simplified example using this approach with the following assumptions:

*An advertiser wants to target only those households with children under 18.

*35% of households have a child under 18 present.

The cost per thousand (CPM) to buy an advertisement on cable TV is $25/M.

*The cable system reaches 100,000 households.

Advertisers (currently) make choices to maximize coverage of the target. They:

*Buy spots in program targeted at children.

*Target areas with highest populations of children.

*Increase reach and frequency of advertising to make sure the target is eventually hit.

*Assume 100,000 households are potentially “reached” at a cost of $25/M for a total of $2500.

*Since only 35,000 households contained children, the effective CPM (or CPTM – Cost per Targeted thousand) was $71.43 ($2500/35).

*If only those zip codes which delivered higher than average presence of children were targeted (assuming an average penetration of 45%), the cost would be $1250 (50,000 households at $25/M).

*The CPTM was $55.56 ($1250/(45% of 50,000)). Yet, only 50% of the potential households with children were reached. Efficiency was improved, but reach was reduced.

With household targeted, cable-delivered advertising, only the 35,000 with children present would be sent the ad. Most advertisers would pay a premium to achieve both reach and efficiency. Let’s assume a CPM of $50/M—a premium since only the right target would be reached.

The cost to reach 35,000 households with children is $1,750 ($50/M x 35,000). Total cost was less than a full saturation of households, but the reach was the same and the “waste” was reduced.

*The remaining 65,000 households could be targeted with other ads at the regular cost of $25/M for a total cost of $1500.

*Combined, the cable system was able to deliver greater reach and efficiency for advertisers and receive greater revenue $3250 than before.

This over-simplified example could yield significant improvements for the bottom line of both advertisers and media. Even consumers could benefit with the promise of more relevant advertising reaching them in their homes.

So, where is the perfect storm? We may have the technology and other elements in place, but some things are missing. Above all, the players at every level—i.e., advertisers, advertising agencies, media buyers and advertising sales—will need to change their processes and procedures.

The sales side of advertising is based upon quantity of households sold (maximizing revenue) and the efficiency of the system to sell and place the ads. The purchasing side wants efficiency, reach and lowest cost. Until the sales side and the buy side of advertising develop the economic infrastructure for defining target audience, placing as and measuring results with household targeting, we will have to wait for that perfect storm.

Donald P. Hinman, Ph. D. is executive vice president and senior principal of the Allant Group, Naperville, IL.