The problem with ROI calculators

April 11, 2009 by Dave Haynes

The UK industry news watcher AKA had a post up last June about a US company called doPublicity that has a digital signage platform aimed at local businesses. The weirdness that can happen with alerts and industry portals is I just read about it now, and not by going to aka.

What caught my eye was the reference to an online network assessment and profitability calculator that can help its potential customers figure out what a system might cost versus what it might bring back in new ad revenues.

ROI calculators like this can be a really useful mechanism for starting to sort out the potential impact a DS install may have for a business, though it can be wildly imperfect. 

The one this Los Altos, California firm has pulled together is clever, and in many ways useful, but where it starts to fall down is on the advertising revenue side.

It perpetuates the whole Pot of Gold theory about digital signage screens being amazing new revenue sources for small retailers. With some possible exceptions, it isn’t happening like that, and probably never will.

The calculator does a good basic job of sorting out the elemental site costs, asking how many locations, and baking in the costs of screens, players and installs. The player cost is pretty high, but not crazy-high.

So using my cooked-up scenario of a five location dollar store chain, the start-up costs is $10,500 using the calculator.

Now comes the part that doesn’t work so hot. The calculator asks a series of questions intended to estimate advertising capacity and revenue, and therefore the profitability of the screens. Where it gets hung up is on what to estimate as the cost per ad. This thing is asking me to estimate the price per spot, as in how many cents per spot?

Huh?

This industry does media planning and sales using things like cost per thousand calculations and rate kits built around yardsticks like cost per venue per week. But costs per spot play?

So let’s say it is as low as you can go – one cent per play of a spot. The spots are 15 seconds, and the media loop is 60 per cent ads.

That kicks back an estimate that the aggregate of ads will play out 302,400 times over a month, and therefore generate $3,042 in ad revenue, or $600 per store. After costs, including a pretty interesting rev share stab/grab by doPublicity, the margin is $1,800 to the good, or $360 per store.

The calculator also includes a break-even point analysis, which is a nice way of either grounding expectations a bit or getting retailers more whipped up by thinking they only actually need to fill 14 per cent of the available ad inventory to break even.

Now here’s the trouble with this sort of thing. Selling local advertising is really, really hard work, and an intensely local system may end up being more of a barter network than one where checks are actually being written and passed around. Small business people are getting hit constantly by people wanting to sell them things, including advertising.

The reality of this:

A – Somebody has to sell this store network, which means either the retail owners or staff are taking time away from the core business, or somebody else is doing sales for probably 25 per cent of more sales commission. Those are very real hidden costs, either way.
B – The filled inventory rate will be much lower than expected, and subterranean for six to nine months. Unless the planets somehow align immediately, these things are not revenue-positive for at least a few weeks ro months.
C – Ad calcualations need to bake in audience size through some sort of report of foot traffic, percentage who notice the screen and dwell/loop time. 

The real revenues versus real costs are really hard for things like calculators to spit out. Calculators don’t have perspective fields in them that can bake in what really happens.

If it seems like I am kicking these guys around a little bit, I’m not. I actually think it’s great when companies try to apply some business discipline to this stuff, and this is a pretty nice but imperfect run at things. They do stress it is not intended as accounting advice.

But it has to be just a tool to start the analysis, not close the sale. It should not be regarded as some conclusive evidence of why a screen network is pretty much a money tree. It might generate some business early, but also nurture an ever-growing crowd of disappointed customers.

The problem is people get all whipped up about how great this will all be, based on some simple calculations, and only find out once thewy’re into it just how hard the advertising sales game can be.

I’ve seen and also built some spreadsheet calculators based more on what well-placed screens in retail can do for boosting sales, and for a lot of retailers weighing the merits of investing in DS, THAT’S the sort of number-crunching they should be doing. That’s immediately relevant and measurable for them, and in-store sales promotion (unlike ad sales) is something they know how to do.