Gambling on Twitter: Dollars to cents?

Q: How do you make $1 million in Technology?

A: Start with $100 million

Some have called Twitter narcissistic. Others, blogging for the attention deficit disordered. Many techies have called Twitter nothing more than a feature. Google's Eric Schmidt called it, the greatest social media tool since, well, email [not really, he called it "a poor man's email"...which I guess means all of us who aren't billionaires like Eric, Serge and Larry! Or was he talking about a deficit of substance? hmm]

But I digress. How about Twitter as a gamble? As a firm believer in the wisdom of the marketplace, I'll refer to what some gamblers venture capitalists have decided to call Twitter: a $158 million investment. [here]

What's Twitter really worth? Better yet, what's a follower for your brand's Twitter feed worth?

Following up on last week's calculation of web visitor worth [here] I apply the same misguided logic to the Twitter investment to conclude that a Twitter follower is worth...wait for it...$0.21 per month! (see math below)

At least, that's the revenue Twitter will have to generate off each unique visitor to pay back the VC investment over 3 years.

So What?

To get a 10x return on their investment over three years, the gamblers venturesome will need Twitter's unicorn-like powers to magically tweet $2.31 of additional cash money per user per month. Where do you think that $2.31 per month per visitor is going to come from? Subscription fees? Micropayments per tweet? The Federal Reserve?

Or is there another source? Say, hmm, I don't know, maybe, ADVERTISING!

Of course advertising is always the easy answer. It's probably the one VC's are counting on.

For a user, what kind of advertising am I paying attention to while busily crafting each and every one of the 140-character Twitter treats I'm tweeting to my tweet-toofed followers?

For a marketer, why would I pay to advertise on someone else's feed when I can engage potential customers directly on my own? Maybe that's what Twitter will do...charge companies a fee based on followers. If that's the case, then a marketer might want to look at $2.31 as an upper limit cost for a follower on Twitter.

And in figuring the metric, if I spend $5000 on my Twitter media presence, then I might consider 2164 followers a goal number...that's where the gamblin' smart money seems to have it valued anyway.

Of course, if you can get a follower to do more than follow (say visit an eCommerce site or Retweet for you) then you can figure your return on Twitter in a more nuanced manner. Which is to say, a manner driven by objectives, informed by measurement and, thus, a manner that has less of the appearance of a gamble.

Doing the math (please feel free to challenge this...I was not a math major):

Total VC investment: $158,000,000 [here]

Unique Monthly Visitors (Aug 09, comscore): 28,100,000

One month breakeven return per visitor: $7.68

Monthly breakeven return required per visitor, 1Year: $0.63

Expected breakeven term: 3 years

Expected Return on Investment: 10X

Necessary Revenue Enhancement per visitor per month to meet investment objectives: $2.31 (gotta pay back the original $0.21!)

Value-based billing: Agencies at the table?

Bloomberg posted a story on P+G's decision to move Grey Advertising's work on Pringle's to a value-based compensation setup last month (here). All I can say is, it's about time!

I've worked at two companies whose billings were tied, in part, to performance-based incentives derived from the client's overall success. And while the P+G move (along with several other consumer companies) comes later in the game, it's also a bit more comprehensive.

Some in the advertising business are worried that it is merely a ruse to reduce fees. Others seem to embrace the concept. Here's four reasons I think it's a good thing:

1. Results: In my experiences with value-based billing, the discipline of evaluation creates discipline in the thinking. I'm not talking about stifling creativity. On the contary, agencies get passionate about the work...the risk is that they get wedded to an idea even when it can't deliver results. Value-based approaches that rely on meaningful measurement ensure that outcomes are considered throughout the ideation and execution.

2. Trust: When an agency's financial success is tied--directly--to the business success of the client, it makes the partnership more meaningful and easier to understand for both parties. Both parties can trust that they are working together for the same thing. And of course, trust is a key element of any long term relationship.

3. Strategy: Much talk is made of being strategic in the agency business. However, much work ends up being quite tactical in the context of larger business go-to-market strategies. When agencies are seen as partners, sharing the risk based on business strategies, they may find themselves earning a seat at a much larger table.

4. Inevitability: It isn't going to go back to the way it was. For decades, marketers half jokingly used the quote that "half their advertising worked, they just didn't know which half." But now the precise measurability that comes standard with all things digital is seeping into the expectation of all marketing and advertising.

Of course there are risks to the agency...that's the shared part of shared risk...some clients may use it as a means of giving agency billings a beat down. Others may pursue ill-conceived or simplistic measurement schemes. And the biggest risk is that the agency's work is held directly accountable for things it can't impact directly.

But while these risks are real to agencies, it may be wise to remember that clients has always taken a very real risk with their agencies when payng upfront or for hours worked. It may just be that, like their customers, companies have decided they'd like a little less risk in their worlds. Agencies that embrace value-based approaches may benefit by getting a more enduring seat at the table...instead of a place on it.