If you're not careful, efficiency could kill your business

If you’re not careful, efficiency could kill your business.

That was the destination on a little mental raft trip I took on the stream of consciousness last week. I was waiting for an airport shuttle at the Hilton Tokyo Bay in Japan and happened upon this spectacular holiday model train display.

The next thing I noticed was the advertising – sponsor logos were slathered on every element of the display – trains, bridges, even hot air balloons “floating” above the scene. I suppose that recognition could have inspired several reactions, but mine was “I can’t believe any of those companies would get any decent return on investment for this display.”

Then I wondered what conditioned me to think that.

I looked more closely and found that the display was an annual tradition at the hotel, and this year was a benefit for children’s charities supporting young people affected by the devastating earthquake and tsunami that hit Japan earlier this year. So return on advertising investment wasn’t the primary objective of participating businesses.

But the charitable contributions weren’t the only positive impact of these businesses supporting this display. Presumably, some of the people who designed, built and sold the trains and scenery in the display got paid. As did the salespeople who solicited the businesses’ participation. That meant more income for those workers – income that not only helped support their families, but also provided income for the people whose products and services those families paid for.

It’s Econ 101: Each amount of money spent in an economy creates several times its value as it circulates. That’s why an increase in spending by one person or one business can reverberate in creating a bit of additional income for many. And it’s also why a reduction in spending can reverberate and cut incomes for many, as well.

But it’s also a lesson lost on managers and consultants who look only at the first level – the immediate impact of spending, forgetting the reverberation, forgetting the second- and third-level of spending that an initial investment can enable.

How does this affect the publishing industry, you might ask?

Improvements in advertising tracking metrics have made it possible for advertisers to determine the return on investment for individual ad placements with greater precision than ever before. That’s driven many ad managers and agencies to radically change the media and publications in which the advertise, to chase the best ROI performance.

And traditional, ad-supported publications, such as newspapers, have suffered as a result.

But first-level ROI doesn’t measure the full impact of an ad. An “efficient” decision to maximize ad spending by looking at immediate ROI can leave an advertiser at risk in the long term if it ignores important second- and third-level affects of that ad spending.

Buy your ads too efficiently, and you could end up on nothing but robot-produced websites that slap a bunch of keywords onto a webpage, leaving readers no place to click but your ad. While you might end up with a slew of new visitors initially, those ads won’t help you much when interest in the niche you market to dries up because the websites that cultivated that community went under for lack of ad revenue. But that’s what you can get when managers and consultants understand math only in terms of simple, linear algebra and not in terms of more complex, multi-variable calculus.

Some advertisers recognize this risk, thank goodness. The first major advertiser we signed on our violin website told us that they didn’t care about click-through rates, after I tried to tell them about our metrics. They told me that they simply wanted to ensure that our site stayed online and grew, helping to cultivate interest in the violin. After all, if there’s no new generation of violinists and violin fans, their business is doomed.

They didn’t care most about the first-level ROI – how many leads we could generate from an ad on our site. They cared more about the second-level ROI – how much we as a publication could help grow their customer base by getting people interested in the violin.

Obviously, if we generated no ad clicks for the advertiser, they would begin to question whether we were doing enough to cultivate the type of community they wanted to support, so we can’t completely forget first-level ROI. But ever since then, I’ve made it a point not to sell potential advertisers on clicks, but on the community benefits of supporting our publication, and how that support makes its way around to increasing the market potential for their business or organization.

This logic works applies to publishers, as well as to advertisers. If I had to rely on the ROI from a single news article to justify spending the money to hire someone to write it (or even to give myself that assignment), I’d never have any original content on my website. I have yet to run a blog post that paid for itself solely from the ad revenue generated on that page within even a month of its publication.

And yet, without content, I’d have no revenue at all. To budget effectively, I can’t look only at revenue from a single article’s URL. I have to consider how much traffic that article brings to the website, if it keeps existing readers on the site longer and if it encourages readers to return at some point in the future. In other words, I need to consider second- and third-level effects of publishing the story or adding the content when deciding where to spend my editorial budget.

I also need to look beyond my publication when thinking about spending, as well. As a publisher, I need to consider how my spending is helping to stimulate the community I’m covering. Am I contributing to worthy causes? Am I helping keep my money in the community by making my necessary purchases with people in the community, wherever possible? Or am I missing opportunities to help cultivate the economic health of the community I’m relying on for my business to survive? If that’s not part of your business calculus, you’re thinking too simplistically for your long-term business health.

Ultimately, I was glad that all those businesses in Japan were able to look far enough ahead to recognize the value in sponsoring a lovely holiday display. And I was ashamed that I’d forgotten that lesson for a moment. As I dropped a few thousand yen in the collection box, I wished that more businesses would think about the impact of their business decisions upon the health of their communities.

Especially advertisers and publishers.