Measuring Value in an Advertising-Supported Industry

There are many competing theories of value in economics, but the neoclassical assignment of value to an object or service based on the price it would bring in an open and competitive market is fairly widespread.

This definition of value, unfortunately, requires rather significant tweaking to work in an advertising-supported market. With “free to consumer” products such as web sites, newspapers, and broadcast television, the consumer product’s “price” is paid indirectly by advertisers. (The advertisers ostensibly are leading the consumer to some other product which itself has value.)

To model the value of an advertiser-supported product based on the price paid for the advertising opportunity is about the best valuation we can hope for. In the fluid economy of internet advertising, we have something very close to the “open and competitive market” required. Unfortunately, unlike in the examples of newspapers and television programs, there exists no clear one-to-one mapping between the consumer product offered and the advertising opportunity actually paid for. Various attempts to map one on the other have proven clumsy, forcing us into unnatural analyses such as treating individual “page views” as consumer products.

Yet try we must. The value of the products and services we offer is, in aggregate, defined to be the amount of advertising money we bring in. It is sometimes useful to assign a value that is based on the number of customers. The average value of our service is simply the advertising revenue divided by the number of customers (visitors to our website) in any given period. Having an average measure of value like this allows us to examine and optimize our service’s value to users independently of growth patterns.

It’s important to remember that what we are measuring is the value of our service to users, not the value of our website or company as a whole. Measuring that is a far more complicated matter, as it depends heavily on one’s perception of our potential to grow our service’s value to our users. This speculative assignment of value for a web site or company can be seen every day in investments and acquisitions in the internet economy.