Advertising Isn’t a Revenue Model
November 26th, 2007 | Categories: launch, marketing, markets, networks, social media, strategy, trendsI know it’s a bold statement that isn’t entirely true, but let me explain. Obviously, a large number of successful companies can call advertising their revenue model, but this is only after siginificant traffic growth. The number of new start-ups that launch with an advertising model in mind, compared with the number that can actually sustain such a model is minimal. I would consider it a generous estimate to say 1% or so can do it.
Let’s do a little math experiment (using some basic assumptions)…
Company XYZ has 3 full-time employees. Let’s also say that they have no other expenses as they run out of a makeshift basement office. Assuming an extremely modest salary of $50,000 a year each, the company needs to generate revenues of $150,000 a year just to break even. Keep in mind that we are assuming no other expenses exist, even though hosting, bandwidth, and other factors should (in theory) play into the equation.
So, in order to break even, the company needs to generate $150,000, or $12,500 a month, or $417 a day. That doesn’t seem too unrealistic. Now, let’s assume that the website can achieve a $5 CPM, which is relatively good for a small company. The company would need to generate 83,000 page views per day just to break even. This is where many begin to realize that monetizing via advertising is much harder than it seems. From a monthly perspective, that’s 2.5 million page views per month. That’s a significant number. Once again, keep in mind that this is assuming no other expenses and doesn’t include a lifestyle of luxury.
[Please feel free to rip apart my math, point out any inaccuracies, or add any relevant commentary.]
On the whole, what I’m trying to say is that an advertising model is possible to sustain, but it’s rare. Other forms of monetization are much more effective and attainable. With such high levels of competition in every area of the Internet, your ability to capitalize on ads has been greatly diminished.
As we all know though, many of these companies never intended on monetizing via advertising like they say. Their sole intention was to build traffic and sell off to a major player (Google, Yahoo, Microsoft). This is the typical web 2.0 revenue model. This “hope for the best” strategy is risky, but has paid dividends for a small minority. I wouldn’t recommend it though.
November 27th, 2007 at 4:36 am
Aidan - I completely agree with you but would like your opinion on another related issue: We launched giftgirl.com back on Oct 25th with (we think) a novel approach to the whole rev model thing. Agree that the ad model works in 1 of 2 ways: you have ginormous traffic and are in a position to have 1 or 2 well placed big money ads or you’re small and have to litter your site with ads and ruin the experience (perhaps a bad assumption there but I personally can’t stand sites riddled with ads and not much content (see glam.com) So we went the route of membership. Thinking was, spend all our effort and money on building something people really love/want/can use and try hard as hell to convince them that, in the end , it’s not much money for the value they receive. Funny thing is that everywhere we go we’re told that it’ll never work and we need to go the ad route. Thoughts?
November 27th, 2007 at 10:16 am
I don’t agree with you at all.
Most startups, and that is what you are referring to, don’t have fulltime employees - much less three. Most startups are a labor of love and the people involved have fulltime jobs elsewhere.
The exception is the rare startup that is funded out of the gate. But thats a rare exception. You have to be, like, Jason Calacanis.
November 27th, 2007 at 11:45 am
Hey Michael,
I checked out your site and I’m not convinced that advertising, nor membership, is the best revenue model. I understand that you don’t want to be an online store, but have you explored the idea of an affiliate model?
Cheers,
Aidan
November 27th, 2007 at 12:36 pm
Living & working in Silicon Valley, and running a marketing consulting business, has warped my personal sense of “reality”. Take that as a caveat before the rest of my comments…
In terms of revenue model, advertising alone isn’t a great option. Affiliate + advertising + sponsorship + business development are those that make the most sense. And yes, develop the product first, before you leave your day job.
OR, you put together a great plan & go the angel or VC route…that enables you to move faster, but you trade speed of execution with a management team that you’ll need to present to, regularly, to keep them happy & communicate your progress towards the agreed upon milestones.
Having worked for Yahoo for nearly two years, a half dozen start ups, and consulted for nearly 50 different companies over the past year, I’m convinced that advertising, alone, isn’t a revenue model. So, you scored there. However, I’ve yet to work with a single company who stopped at advertising (Google Adsense anyone?) and didn’t also try affiliate relationships, commission junction, ebay, amazon, other private placement deals, OR hire on a sales person to specifically try to bag elephants.
The companies I’ve seen (FunAdvice, my own free time start up) with no VC money, and a lack of full time employees end up doing the Adsense thing, typically, because they are either lazy OR they are busy developing the product. And, in a race to capture attention, if you don’t have to live off the revenue, the only thing that matters is your growth rate. The revenue growth, if you do it part time, is there to fund extra part time hands to continue the growth.
Then, once you hit “critical mass” which from where we are & what we’ve seen with other start ups is around 3-5 million uniques a month, you get serious about monetization. Sell direct, partner, and build around revenue.
At the 2.5 million pageview marker (which is where we’re at, btw) unless you live in a cheaper area than Silicon Valley, you can’t keep a team here for $50K per head. And, you’d have to have engineering talent among the 1.5 heads you could fund with the revenue that comes with 2.5 million pageviews. If you do drive more revenue than that with those pageview numbers, growth slows, and you won’t ever achieve a bigger success story.
My .02 cents. Nice write up, though.
November 27th, 2007 at 1:21 pm
Jeremy - Great comment. Thanks for the insight
November 28th, 2007 at 12:52 pm
[…] More: Aidan Henry had a good post this week on the economics of online advertising. His math is eye-opening, and hammers home the point that being small online makes it hard to be big in business. […]