Monday, March 12, 2012

Website Ads are Not a Revenue Stream for Startups

One of the biggest red flags I see in many Internet-related business plans today is advertising as the initial revenue stream, or a key part of it. If challenged, the founder usually cites the Facebook business model (free service to users, revenue from ads), but forgets that Facebook has had several hundred million in funding, and has been profitable only in the last couple of years.

The most challenging time is your first years, when your site is unknown, and your page-views are low. Until you get a million page-views per month, your revenue will be negligible, and advertisers won’t be interested in your site. Don’t count on that to fund your startup.

This is a tough business. It can be very successful like it now is for Facebook, but entrepreneurs usually underestimate how long it will take for page-views to ramp. They might see early traction due to early promotions, or special advertiser deals, but then reality sets in.

To better understand these realities, let’s clarify some terminology. Unless you live in this world every day, you are probably as confused as I was by the different advertising models, so let me outline the common ones:

  1. Pay per click (PPC). In this most popular model, advertisers pay each time a user clicks on an ad and is redirected to the advertiser website. Advertisers do not pay for each ad view, but only when the ad is clicked on. For advertisers, this is called cost per click (CPC).

  2. Pay per view (PPV, PPI or PPM). With this model, you get paid for each ad view or page-view (same as impression). For advertisers, this is cost per impression (CPI), or cost per mille (CPM) per thousand impressions. Advertisers normally prefer CPC, since they don’t like to pay when you ignore their ad.

  3. Pay per action (PPA or PPL). This advertising model was added a few years ago to mitigate the risks of click fraud. Here the advertiser pays only if a customer has been delivered to a website and takes a further action (conversion), such as buying a product or filling out a web form. The advertiser side is called cost per action (CPA) or cost per lead (CPL).

Now back to the revenue realities. If a startup wants to get the attention of investors, it needs to show large growth, like $50 million in revenue in five years. Today, without highly specialized targeting, the rule-of-thumb expectation should be no more than $1 in advertising revenue per thousand page-views.

To get to $50 million in revenue you would need 50 billion page views in a year, or just over 4 billion per month. Facebook is far above this range now, now with over 1 trillion page views, but only the top 10 sites in the US are in the right ballpark, and all took several years to get there, and none of these have been startups for quite some time.

It doesn’t matter that the ads themselves come in a myriad of shapes and sizes – banner, panel, floating, expanding, wallpaper, trick banner, pop-up, pop-under, or even video. Costs and payments vary by size, level of targeting, and volume. A current trend to increase revenue is to make advertisements more interactive, but the basic numbers haven’t changed much.

The bottom line is that any online advertising revenue you project in the first couple of years for your startup will be heavily discounted by any savvy investor, and will likely cause your business plan to be rejected. Face reality.

Investors know that during this early period, you will likely be spending more heavily than you expect, to build page-views, rather than collecting revenue from the millions of users you won’t have yet.

Marty Zwilling


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15 comments:

  1. Hi,
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    ReplyDelete
  2. Another great post Marty

    I think it's worth noting that Facebook, Twitter and perhaps even Google didn't chase the advertising dollar until their traffic levels were extremely high.

    I would strongly advise against trying to monetize until there is some traffic to convert.

    ReplyDelete
  3. This is an excellent point. Your efforts should be spent first on gathering a crowd, and THEN on trying to get them to convert! Building the infrastructure for conversions and then obsessing about every single visitor definitely seems to be the backwards way to deal with ads.

    ReplyDelete
  4. Ah! Finally. Had fights over ads being revenue with fellow entrepreneurs, let me shatter their cardiacs with a link to this article

    ReplyDelete
  5. @Dinabandhu, Do not spread incorrect information and indulge in self promotion. PartnerOne only accepts customers who have more than 500,000 USD turnover. Marty is talking about start ups. Wake up dude!!

    ReplyDelete
  6. Excellent post. I am a partner in a business planning firm and see numerous entrepreneurs seeking to monetize their website's via advertising. It is important at the early stage of an online venture to take into account the fact that advertising revenue projections may not materialize as planned and make contingencies for such in your capital requirements and burn rate.

    ReplyDelete
  7. There is one more advertising model that many companies follow and that is Flat Rate Advertising. In this type, the advertiser pays a fixed amount for the fixed period of time. You can read more here
    http://www.bloggersjoy.com/advertise-here

    ReplyDelete
  8. We recently installed infolinks on http://meebal.com and immediately our readers let us know they hated it. We looked at the model and it didn't seem too bad but all it was delivering was ads for Facebook regardless of the keyword.

    We decided to turn it off and wait until user figures were high enough to attract advertising.

    ReplyDelete
  9. In this advertising post is nice.There is one more advertising model that many companies follow and that is Flat Rate Advertising.

    ReplyDelete
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  11. Excellent post. I am a partner in a business planning firm and see numerous entrepreneurs seeking to monetize their website's via advertising. It is important at the early stage of an online venture to take into account the fact that advertising revenue projections may not materialize as planned and make contingencies for such in your capital requirements and burn rate.


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  12. thank you for all the info. very good summary in any case it's going to help me ...

    ReplyDelete
  13. If challenged, the founder usually cites the Facebook business model (free service to users, revenue from ads), but forgets that Facebook has had several hundred million in funding, and has been profitable only in the last couple of years. is there a place I can buy targeted traffic

    ReplyDelete
  14. This is a tough business. It can be very successful like it now is for Facebook, but entrepreneurs usually underestimate how long it will take for page-views to ramp. They might see early traction due to early promotions, or special advertiser deals, but then reality sets in. popunder traffic

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