Having never had a blog before, I never had the chance to get some perspectives out in the market that I have been dying to get off my chest. Here is one:
So when I first heard of Root Markets, I thought, “hmmm, so they are gathering behavioral data directly from consumers. I should learn more about this because it is something unique and different in the market.” That is true and I love people thinking out of the box, however that model is super-hard to make work. Their proclaimed business model was that they would sell this data to advertisers for behaviorally targeted advertising campaigns, however that model requires relatively large populations to target to create efficiencies in advertising. For example, let’s say that I wanted to spend $70,000 at $10 CPMs to target people that have visited TV-related web sites. That’s 7 million impressions. Assuming we run this for a week, pace it evenly and have some frequency cap like 3/24, you need 333,334 unique people that have exhibited that behavior.
And that assumes that we see all 333,334 people 3 times every day for a week. Here, network reach comes into play, but even if your network was the entire Internet, that probably doesn’t work. Best case, maybe you need 600,000 unique visitors that have exhibited the behavior you are looking for. Realistically, you probably need 2 or 3 million?
Is it realistic to think that Root could collect, package, and sell that volume of behavioral data? Especially when they imply that they will allow people to essentially opt-in to an advertisement? So Root espoused that they would allow people to essentially be compensated for receiving messages. Let’s use this example some more. Maybe 30% of the $70,000 would be spent by Root to acquire inventory. So the maximum amount left over for paying consumers would $50,000. So if we say you need 2 million people in the targetable population, then each one could get an offer from the marketer of $0.025. Holy micropayment!
And that assumes that Root runs the business at no margin and gets inventory dirt cheap. If they have to rev share with publishers, that could be cut in half.
Would this change if the behavior was more direct response? Let’s run some quick numbers there: A mortgage lead (because Root was obsessed with mortgage arbitrage) might be worth $35. If someone exhibits a behavior “correlated” with mortgage leads, maybe you have a CTR of 2% for ads you show them and then a conversion rate of 5%. Once again, you have to buy the inventory, so lets carve out 30% for that. Ok, now we do the math and see what we have: Each person that exhibited that behavior could get a big fat check for $0.0245. Not as lucrative a business. And frankly, there are probably much smaller populations of people “loving mortgages” then people “loving TV”, so the direct response opportunity has lower absolute dollar value.
So if you are an individual participating in Roots scheme and it takes off and millions of people sign up and advertisers are shooting them offers left and right, are these opportunities lucrative enough for people to take the time to review and accept them? If you had 20 advertisers similar to the two examples offering you the chance to see their ads as you surfed the Internet (is it realistic for someone to opt into all of these offers or is there a saturation point where they can view no further ads?) and you reviewed and opted into each offer then you would have made a little less than $0.50.
Root, I love you for being different, but I am not smart enough to see how it works! Of course, I think they subsequently switched directions and are no longer doing this. But they got a TON of press for a few months. Why didn’t anyone else do this math? Why didn’t the business plan writers?
This post was insanely long. I will do another one to talk about AttentionTrust and the more macro business challenge in a bit.