Digital Marketing Concepts: Theories, Metrics, and Tools
Profit
Profit in economics is defined as the difference between the revenue a firm generates and the costs that it incurs. Thus:
\[ \text{Profit} = \text{Revenue} - \text{Cost} \]
Let’s break down this formula into minute details of significance:
\[ \pi = p \times (MKTSZ \times MKTSH) - [c \times (MKTSZ \times MKTSH) + FC] \]
where \(\pi\) is Profit, \(p\) is Unit Price, \(MKTSZ\) is Market Size, \(MKTSH\) is Market Share, \(c\) is Unit Cost, and \(FC\) is Fixed Cost.
Profits are not skyrocketing because \(p\), \(MKTSZ\), and \(MKTSH\) are ever shrinking for a firm. Therefore, the firm has to remain very competitive and differentiate its product to maintain market size and market share and charge higher prices. Note that the initial production cost of information goods is very high. However, reproduction and copy of the same good become much cheaper. Therefore, it takes time to break even the initial cost. Furthermore, due to virtually zero transportation costs, the price of information goods tends to be lower.
Example
A case of e-Commerce Industry. There are at least 1 million e-com sites serving consumers all over the world. Assuming the minimum revenues of US$ 100k per year and the number of meaningful e-com sites around the world to be about 100,000, we see that to serve 500 million people; each e-com site is left with 5000 consumers per site. The question is, how sustainable is that number? The big players – Amazon in the USA and Flipkart in India can sustain because they own massive consumer/market share. But there are just too many new e-com sites trying to capture a share of the e-com space that makes it harder to sustain in the long run.
Marginal Cost
Marginal cost measures the increase in the total cost of production as a result of producing one more unit of output. It is the ratio of change in the cost to change in output. Thus:
\[ MC = \frac{C_{2}-C_{1}}{Y_{2}-Y_{1}} = \frac{\Delta C}{\Delta Y} \]
where \(MC\) is marginal Cost, \(\Delta C\) is change in cost, \(\Delta Y\) is change in output. Thus, to be profitable, the marginal cost must remain less than or equal to marginal revenue.
The next question that arises is: if marginal cost is virtually zero, then how come profits are not exorbitant (e.g., Amazon has barely made profits). To understand this dilemma, look into profit calculation above.
Cost Benefit Analysis
Cost-Benefit Analysis from a consumer perspective is the mental process of weighing the advantages (benefits) against the disadvantages (costs) before making a purchase or consumption decision.
Purpose of Cost-Benefit Analysis:
- Evaluate if a purchase is worth the money
- Compare different product options
- Maximize value and satisfaction
- Avoid buyer’s remorse
- Make rational spending decisions
\[ \text{Net Value} = \text{Total Benefits} - \text{Total Costs} \] Decision Rule:
- If \(\text{Net Value} > 0\) → Make the purchase
- If \(\text{Net Value} \leq 0\) → Don’t buy
Sometimes Value Ratio is used to make decisions:
\[ \text{Value Ratio} = \frac{\text{Total Benefits}}{\text{Total Costs}} \]
Decision Rule:
- If \(\text{Value Ratio} > 1\) → Make the purchase
- If \(\text{Value Ratio} \leq 1\) → Don’t buy
Types of Cost to Customer
Customers experience three types of costs when indulging in a consumption process.
Nominal Cost (NC): The price that customers pay to buy products or services. This is monetary cost.
Opportunity Cost (OC): Forgone cost that customers incur of not exploring alternatives. This is non-monetary cost.
3 Loyalty Cost (LC): The cost to customers for being loyal (or not changing the habit). This is non-monetary cost.
Example
Decision: Should I buy a $1,200 smartphone or a $400 smartphone?
Premium Phone ($1,200):
- Costs:
- Price: $1,200
- Opportunity cost: Can’t buy tablet
- Learning curve: 2 hours
- Benefits:
- Better camera (value to me: $300)
- Faster performance (value: $200)
- Status symbol (value: $100)
- Lasts 4 years vs. 2 years (value: $400)
- Total perceived value: $1,000
- Net Value = $1,000 - $1,200 = -$200 (Not worth it)
Budget Phone ($400):
- Costs:
- Price: $400
- Shorter lifespan: 2 years
- Benefits:
- Meets basic needs (value: $350)
- Good enough camera (value: $150)
- Saves money for other purchases (value: $200)
- Total perceived value: $700
- Net Value = $700 - $400 = +$300 (Good value)
Decision: Buy the $400 phone (better net value for my needs)
Applying concepts from Lecture
Activity: The “ABC Funnel” Scavenger Hunt
Objective: Apply the ABC (Acquisition, Behavior, Conversion) model from the lecture by finding real data inside the Google Analytics Demo Account.
Your Task: Log in to the “Google Merchandise Store” Demo Account and set the date range for the last 30 days. Navigate through the reports to find the answer to the following three questions—one for each stage of the funnel.
- A - ACQUISITION
- Question: Which marketing channel brought in the most new users?
- Hint: Go to the Reports section, then Acquisition > User acquisition. Look at the chart and table for the “First user default channel group.”
- B - BEHAVIOR
- Question: What was the most popular page on the website (after the homepage)?
- Hint: Go to Reports > Engagement > Pages and screens. Find the page with the most “Views” that isn’t the homepage.
- C - CONVERSION
- Question: What was the total revenue from all purchases, and what was the average amount a customer spent per order?
- Hint: Go to Reports > Monetization > Monetization overview. You will find “Total revenue” and “Average order value” (AOV) in the summary cards.
Bonus Question (Critical Thinking): Look at the Conversion Rate in the User acquisition report (from step 1). Does the channel with the most new users also have the highest conversion rate? Why do you think this is or isn’t the case?