How Things Work: Hedonic Quality Adjustments And Advanced Advertising

In the midst of yet another crisis, James T. Kirk, by now an Admiral but still in command of the USS Enterprise, calmly counseled his young Lieutenant, "You've got to know how a Starship works."  He then transmitted a secret code to the bad guy's ship which lowered his shields. Then he shot him with photon torpedoes and escaped danger, yet again.

Even before this dramatic, cinematic lesson, I liked to know how things work, and so I have a fairly eclectic reading list.   But in reviewing some information on the current economic situation I wasn't quite prepared for the  "hedonic quality adjustment," which turns out to be a statistical technique used in the calculation of the consumer price index.

The CPI itself measures, over time,  the average change in price of a representative basket of goods and services.  Pretty straightforward stuff I thought. We take an everyday set of items and measure whether the price increases, and by how much.

But how does that really work?  As Avery Goodman points out in a very interesting article, the hedonic quality adjustment is one of the techniques used by statisticians in the U.S. Bureau of Labor Statistics to REDUCE the prices of some of the products. They do this "to account for product improvements."

That didn't seem straightforward anymore, so I looked it up on the BLS website and found out that this seemingly objective measure of prices has quite a bit of qualitative judgment being applied by some very smart mathematicians.

You can check out the math if you're pursuing your doctorate but the net result is that the index often doesn't reflect consumer reality, our reality, of prices at the store. In other words, the sophisticated math is correct, but the answer is often wrong.

(By the way, a lower CPI inflation rate triggers lower payments from many government programs and certain financial instruments, but that's another story...)

What excites me today in our industry is the continuing advancement of enabling technology. We're building the equivalent of media photon torpedoes, of hedonic adjustment tools for an expanding set of often real time channels of communication.

But do we know how advertising works?  Do we bring forward, with the technology, the principles of intimately understanding the end user, the detailed knowledge of the competitive set, the value proposition we offer, and how we position ourselves to win?

We talk of advanced advertising capabilities, and I'm convinced they will lead us to the next great era in commercial persuasion.  In fact in a recent article, I referenced a report on the subject as these capabilities related to VOD. The report stated that the technical capabilities we can offer are necessary, but they are not sufficient. It said we must do more as an industry to think like marketers in effectively "productizing" these capabilities, including the effective communication of their benefits to advertisers, agencies, content creators and distributors.

The real lesson from Admiral Kirk, Goodman and from the progress of MediaTech today is that it's most important to know the context, the bigger picture, the purpose of something.  How does a Starship work, not a photon torpedo. How is the CPI really calculated?  How does advertising work?

When we know that, we can best apply the advanced tools we develop to create value for the customers we serve.



1 comment about "How Things Work: Hedonic Quality Adjustments And Advanced Advertising".
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  1. Rick Monihan from None, July 13, 2011 at 11:37 a.m.

    Great article. I could write a thesis about the problems of the CPI, but while it takes up a good portion of the article, it isn't what you're talking about.

    Good advertising is so much more than the numbers and how they are interpreted. Your inclusion of the content distributors was important - good advertising benefits providers of entertainment, too. Bad, or poorly developed, advertising can hurt not just the advertiser themselves, but those trying to help them spread a message.

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