ROI for Consumer Purchasing

I've been doing some thinking on a discussion about customer return on investment that came unraveled - the premises seemed to be valid, and my sense is that the thesis fell apart because concepts were not translated to the customer situation.   So what follows here is likely gratuitous, but seems foundational to evaluations of consumer motivation.

The concepts of investment and return in considerations of return on investment for a commercial operation are similar to those of effort and utility for consumers - but not identical.   Unless these differences are accounted for, the model fails on translation.   So to be a bit tedious ...

Investment becomes Effort

In commerce, investment takes into account the monetary cost necessary to effect an outcome.   The short-sighted businessman will consider only the cost of goods (the money price they pay for possession of an item), but wiser ones will account for the full cost (shipping, storage, and any expense occurred in the process of obtaining and handling the item to produce the return) with all things being reduced to money, and anything that cannot be quantified is discarded from the calculation (which can sometimes lead to bad decisions).

The consumer considers the same factors in evaluating the effort involved to obtain and employ something to achieve a benefit.  In much the same way, his total effort includes more than the money-price to obtain the necessary goods or services, but also includes the effort of obtaining them.    For example, the money price of an item may be cheaper at a store that is 200 miles away, but the time and cost of making the journey to that store make the total effort of obtaining the item greater.

Return becomes Utility

In commerce, the return that will be generated by an investment is often measured in the revenue that will be generated for the outlay of investment.   In the retail sense, items are purchased for resale and the only considerations are the price they will fetch and the number of units that will be sold.  In the manufacturing sense, an investment will increase revenue or decrease cost resulting in a higher profit.

Consumers do not purchase items for resale, nor generally use them to manufacture items for resale.   In the role of "consumer" they simply consume them, without producing any income as a result, and the utility they gain is in the satisfaction of need.     Goods and services are purchased because the consumer wishes to gain the benefit of consuming them - to alleviate pain or achieve pleasure.   But this is highly arbitrary and individualized: how much pain or pleasure will be achieved does not lend itself to quantification, which leads to the next point.

Quantitative becomes Qualitative

The commercial consideration of return on investment is by necessity a financial calculation, which considers all things to be quantifiable and monetized - and often does so in a very haphazard and erroneous manner.   But because money is the primary concern of a commercial enterprise, it does the best it can to consider the financial impact, and is not concerned about qualitative matters.   Even questions such as "how will selling this item impact our reputation" are translated sloppily into a calculation of how reputation will impact future income.   Much more can be said of the errors and of quantification, but the present point is that it is done and that it is the primary, if not sole, motivator for a commercial undertaking.

The consumer consideration is largely non-quantifiable and not subject to mathematical calculation, but instead on the vague sense of attractiveness of a proposition.   Attempting to quantify or monetize attractiveness is even more problematic, so much so that it is generally not attempted,   For example, the question of "how much is it worth to you to be cured of your headache?" cannot be answered with any level of certainty or consistency.   In arrears, it can be said it was "worth" the price of the cure, but when attempting to determine how to price the cure, there can be no answer.

Transporting ROI to Consumption

In the end, I have the sense that attempting to apply ROI to consumption in a specific and quantifiable way is likely a fruitless undertaking because matters of consumption defy quantification.   But at the same time, it does not seem altogether pointless.

While we cannot specify consumer ROI as percentage, it may be sufficient to proceed on the vague sense that the customer considers the utility they will gain and the effort they must expend to gain it - to arrive at a general conclusion of whether the utility exceeds the effort and the undertaking is therefore worthwhile. So we can expect that customers will be motivated to purchase when utility exceeds effort and unmotivated to purchase when it does not.

It also occurs to me that this should be common sense, and can be taken for granted without all this mental meandering and fussiness - but then, that's what a blog is for, and further, it would not have occurred to me to spend so much time brooding over this if someone else hadn't raised the issue, so there likely is some utility in having undertaken the effort ... though it's so much sunk cost at this point.   And, if nothing else, publishing this it should suffice as a rather subtle "April Fools Day" prank.