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Role call: business and finance
In part four of his series on building a successful digital signage team, Bill Gerba looks at the financial work that goes on behind the scenes before the first display is powered up - and how to track ROI once all the displays are on.
October 17, 2005
Running a digital signage business is no different than running any other kind of business. We all face the same financial, staffing and strategic challenges, and we all use our own decision-making processes to reach conclusions that we hope will positively impact our business. Yet while many of the day-to-day business tasks inside a digital signage company might seem ordinary and mundane, some of these can be quite a bit different - and might have a tremendous impact on business performance. The two that I'd like to focus on today are the more interesting budgeting/financing situations that arise when it's time to deploy a major network, along with how to calculate the return-on-investment for your screens once they're in the field.
Budgeting and Financing
The financial management of a digital signage company can be an amazingly complex thing. For example, take what I'll call a "digital signage network owner." This type of firm will typically sign a deal with a retail chain (or several chains), bundle screens, players, software, services and even ad sales together into a single package, and then lease that package to the retailer for an agreed upon period of time. However, depending on the nuances of the package, the digital signage company may have to purchase all of the hardware (which can easily run into the millions of dollars), pre-sell hundreds of hours of advertising time, work out complex revenue-sharing arrangements with the retailer, or even peg their fees to a predetermined ROI number.
Obviously, each of these situations introduces a challenge that, while not unique to the digital signage industry, may be unfamiliar to some. For example, the concept of bundling together hardware, software and services is fairly common, and any number of hardware leasing or factoring companies are available to provide this service. However, factoring a digital signage package can increase its overall cost by 25 percent or more over a period of 3-5 years, and that cost needs to be taken into account. But for small companies deploying a large network, it may be the only way to acquire the necessary equipment, since their only other option is either to drain operating capital (never a healthy business move unless you know that your deal is a really, really, really sure thing), or raising outside funding through an equity sale of some sort (which can be costly and time consuming, even in today's booming private equity market). Larger companies (or subsidiaries of wealthy parent companies) have a few more options, including drawing from lines of credit and internally financing their purchases. But even large firms are loathe to part with so much cash all at once, and often a financing route makes more sense and provides a better path to profitability. And of course, the more financial involvement a digital signage firm can get from their retail partners, the better spread out the risk and rewards are. (As a brief corollary to that: the more financial burden a retailer takes, the more incentive it has to see the program work, and therefore, the more help the digital signage firm will get from the retailer with integrating into co-op programs, etc.)
Arranging for a revenue share is one of those things that seems straightforward at first glance, but can be fraught with challenges and complexities. While many firms would like to pre-negotiate something simple, say a 60/40 revenue split, retailers may prefer a sliding scale where they see a larger percentage of revenues earlier on in the deployment (especially if they have any significant financial obligations in the deal). Similarly, they might agree to a smaller share if the contract term is reduced, or if there are no specific functional requirements that they have to meet. Our experience has shown that the more involvement from a retailer - whether it be financial, sales-related or otherwise, the better. The retailers know their customers, they have preexisting relationships with their suppliers, and they have mechanisms in place to order, deploy and manage static POP displays and signage which can be leveraged into additional ad sales or co-op dollar allotments.
Finally, pre-selling advertising is an equally if not more complex challenge, particularly when the first screens haven't even been installed yet, but that's the subject of next week's article.
ROI Analysis
If you only take one thing away from this entire series, it should be this simple goal: agree upon a solid definition of ROI before you deploy your first screen! There are so many ways to calculate ROI for a digital signage deployment that when the time comes, the digital signage companies and retailers are often at odds as to the best way to calculate the real value of the network. Equally important is the data from which each company will do its ROI analysis. The retailer will obviously have its sales records on hand, while the digital signage company will have its content playback records. It would be nice if one could simply compare the former with the latter and come up with an exact ROI figure, but other factors like typical store performance, seasonal/environmental conditions and other parallel advertising/marketing efforts can impact the perceived ROI.
There are essentially two places where the raw data needed for an ROI analysis can be acquired: either from the retailer, or from the vendors and suppliers purchasing ad space on the screens. Using the retailer's data (if they are willing to provide it to you) is the better choice of the two, since they can supply data for all advertised products, as well as sales trend analyses for past weeks, quarters, years, etc. There are a number of good data sources that your retailer can make available, including:
- Co-op Marketing Data
If the retailer won't agree to provide you with this kind of data, you might be able to negotiate a clause where they calculate the metrics for you based on ad sales data that you provide. Similarly, they might allow you to run certain reports in a "sandbox" of sorts, where you can extract aggregate or comparative data without accessing their entire POS database. With either of these last two arrangements, the retailer can keep their raw sales data confidential while still providing you with the ROI analysis that today's digital signage firms rely on to help sell advertisements and justify the value of their networks.
If obtaining ROI data from the retailer isn't an option, another option is to use sales data from the advertisers and product manufacturers who show content on the network. The same techniques above can be used, but of course the downside is that you will need to compile your ROI report from the separate data sources supplied by each advertiser. Thus, each additional advertiser can add significant complexity to your data gathering and analysis process.
Obviously, this article only represents the tip of the iceberg with respect to corporate financing and ROI analysis, but hopefully it will serve as a starting place for those individuals, teams, or companies facing the challenge of deploying a digital signage network. And of course, there is a wealth of help and information available from online sources, industry organizations like POPAI and the Kiosks.org Association, and other retail, advertising and technology companies who have deployed kiosk and digital signage networks before. Leveraging this wealth of knowledge and experience can help make the unique challenges faced by digital signage companies a little bit easier, allowing you to reach positive ROI and cash flows sooner rather than later.
About the author
Bill Gerba is co-founder and CEO of WireSpring Technologies, a provider of software for digital signage and kiosk networks. He is very active in the self-service and narrowcasting industries, and maintains the Dynamic Digital Signage and Interactive Kiosks Journal.
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