Running the Numbers

Bart Stevens recently suggested a breakdown on the potential economic impact of VRM, based largely on a post by Steve Rubel arguing that $1B is wasted in online advertising today.

First, I anticipate the Personal Data Store to become a design pattern that underlies other VRM services, rather than a service by itself. In fact, a PD isn’t really a PD unless it enables VRM services explicitly… Personal Data Stores aren’t just online storage like Amazon’s S3.

Second, I think the $1 Billion number is far too small. Steve is only estimating the CPM costs for display ads that are literally missed by users during eye tracking studies. That’s an intriguing number because those ads truly are wasted… there isn’t even any brand exposure because the ads are not even seen. It’s like paying for ads in a magazine that is never opened by a real reader.

On the other hand, there are still plenty of ads that are seen by the wrong people and CPC ads that are clicked on by the wrong people. Note that for the “right” people, those ads arguably generate useful brand exposure, so they aren’t wasted.

When advertising starts with the advertiser, it inherently wastes money, as it inevitably buys placement in ineffective or misaligned media. By now it is an old chestnut that advertisers waste half their budget–they just don’t know which half. Sometimes advertising is an investment in exploring potential markets… the goal is the data gained in the test marketing, which isn’t entirely a waste. Other times advertising is educational outreach where the goal isn’t so much to trigger a sale, but instead to introduce people to new products and services. Sometimes this is called demand generation. And that still leaves a vast amount of waste, buying media (offline or online) that just doesn’t perform or create any value. The potential savings in these areas is not only missing from Rubel’s analysis, I’d wager it is far more than $1 billion.

The huge potential of VRM is to turn these models inside-out, by providing a scalable pipeline directly into the product development and sales divisions of capable firms. Instead of Vendors guessing what people want, VRM services can cost-effectively tell Vendors what people truly do want. If the product is available, the sales team can enable purchase and delivery. If the product doesn’t exist, the Vendor can create it if demand is sufficient.

This new paradigm is exactly the shift from Attention to Intention that Doc and I have been advocating. The Attention game is the world of traditional advertising, where the industrial manufacturer competes in mass media to get the attention of the right consumers in order to generate demand for their products and services. Given that attention, they seduce, cajole, and entertain in hopes of winning new sales.

The Intention game, on the other hand, starts with explicit requests from the user to fulfill actual demand. Sometimes that intention will be nascent, needing further exploration and discovery. But eventually, for the segment of the population that finds something they want or need, that intention shifts from educating oneself about available options to seeking specific satisfaction, that is, buying a solution. Because intention starts with the user’s commitment to take the relationship to the next level, it immediately takes a vast amount of guesswork and wasted advertising out of the equation.

This guesswork and wasted advertising is probably closer to $100 billion/year, but that’s just my gut feeling. And that number only addresses the loss side of the equation, that is, the money we save by not wasting product development and advertising dollars. It ignores the value of products and services that today languish as innumerable missed opportunities–missed because companies have no way to efficiently gauge true market demand. There are undoubtedly services and products that exist–or could be profitably offered today–which fail to reach customers because we don’t have a suitable mechanism for connecting the right customers with the right companies. This potential to close the gap between potential sales and unmet demand, is simply too large to estimate.

The Cost-Per-Action/Pay-for-Performance business model of Affiliate Marketing is likely to continue to transform the ad industry, significantly reducing billions in unnecessary expenses, including the $1B wasted on unseen display ads in Rubel’s analysis.

It won’t be until we transform explicit intent into new offerings and new sales that we unleash the vast potential that is VRM.