My Problem With Online Advertising

There’s no one out there that loves the recent advances on the web more than I do. From a user standpoint, “Web 2.0” is all about innovative technologies that push the boundaries of the web without costing a cent. From Flickr to MySpace/Facebook, Google Apps, and YouTube, one common denominator is that they are all free. And that’s awesome – if you are a user. But what about if you are a development company? Those rare successes have baited us into thinking that online advertising is a really viable business option. From my experiences, it’s as much fools gold as relying on someone to buy your business out to make a profit.

Our SportsLizard Price Guide is just about to pass the 20,000 registered user mark. For those who don’t know, a free account gives users 3 price searches per day, and for $5/month you can perform unlimited searches and access a few other premium services. 3 searches per day isn’t much – more of a trial than anything you could routinely use if you’re a collector. Truth be told, we only want people using the site that are willing to pay the $5/month.

To date (since May) there have been ~200,000 price searches performed, mostly by Premium Account holders. So why wouldn’t we open the whole thing up and make it free for everyone? We might be approaching 2 million price searches right now, and with that we could sell a lot of advertising. A lot of people think that way (at times I have), but there are a few fundamental flaws with that thinking:

  1. It’s not that easy to sell the advertising. Ad networks are OK, but if you want to make more than a few dollars CPM (cost per thousand impressions) you’ll need to sell ads directly. I’ve negotiated quite a bit for SportsLizard with the “best” companies in our industry – many of which have contacted us – and it’s REALLY hard to get that from them. They want cheap ads ($1-$2 CPM) because some other stupid site owner will offer it to them. Never mind that the other site is plastered with ads and the quality of visitor is low and won’t convert to sales for them – they don’t care/aren’t smart enough to draw that conclusion. They just want to buy cheap ads. Which leaves you with two options: cover your site with a crazy amount of ads or stick with ad networks (AdSense, YPN, Value Click, Commission Junction) and earn a few bucks CPM. Think about that – for every THOUSAND impressions of your ads you’re only making $1-$3. That takes a crapload of scaling to become profitable.
  2. If you DO scale that to profitability you’ll be massive enough to start dictating higher rates from people – maybe as much as $10 CPM. But scaling to that size means you’ll need millions and millions of visitors each month. And that means you’ll need multiple servers and a larger customer service staff and more programmers…all so you can make money selling ads. That probably requires venture capital or angel investing to scale the company, and you still aren’t guaranteed anything. Getting that kind of traffic is tough.
  3. The goal of your site becomes to get people to click away to another site! To keep your advertisers happy, you’ll need to show a high CTR (click through rate) and, if they have a good analytics program, show them that those customers are profitable for them. I don’t ever want to run a site where I encourage people to leave. This is where online ads differ from newspapers and magazines. If you go to your computer and type in the URL you see in a magazine ad, you still have the physical copy in your hand. You’ll probably keep reading at some point. The content still matters. On a website that baits people into clicking, good content can be a hindrance.

Or we could just charge $5/month/user 🙂 It doesn’t drain our single server. It doesn’t overwhelm us with customer service issues. At 1,000 paying users, which we should reach by the end of the year, we’ll be making $5k/month in recurring revenue. To make that in ad revenue – assuming you get $5 CPM…which is tough – you’d need to generate 1 MILLION ad impressions each month, not to mention handle all sorts of scaling issues.

Something to consider when you decide to start the next big thing. At Pure Adapt, we’ll certainly take our “home run swings” with cool projects that *could* make a lot of money if they blew up, but our core projects are always going to be focused around things that can generate money immediately without extreme scaling and dependence on advertising revenue.

10 comments on My Problem With Online Advertising

  1. Adam Gilbert says:

    Adam,

    Great post as usual. You hit the nail on the head. There’s no reason to rephrase what you wrote but I couldn’t agree with you more.

    Sites that plaster their pages with ads look incredibly tacky and unprofessional.

    Lately, I’ve been seeing a few paid sites that I belong to INTRODUCE ads. Why in the world would they want to take away from their customers experience?

    Keep at it bro.

    -Adam

  2. Adam,

    Are you sure you can only get such a low rate for your ads? I’ve seen companies quoting $50-$75 CPM for a single banner ad.

    Maybe you need to spend some time educating your customers – show them how important targeted advertising is.

    Cheers,
    Scott

  3. Adam McFarland says:

    Hi Scott,

    Do you have an example? Are you sure that wasn’t cost per million you were looking at?

    Of all my sites and my clients sites and articles I’ve read, I’ve never seen anything over $15 CPM, and that’s charged by Beckett.com (a leader in the collectibles industry, who usually has hardly any of their banners filled).

    In general, ad networks like Value Click promise $2 CPM and that’s considered high. Companies like Gorilla Nation claim to get advertisers $5-$10 CPM and Business 2.0 Magazine called that revolutionary in an article about online advertising a few months back.

    I’d be surprised if anyone actually paid those prices….and if they do, let me know, because I’d like to get into that industry 🙂

    Adam

  4. Aspiring Entreprenuer says:

    Thanks for ur great post…
    Yesterday only i have been thinking about how to raise money from a entertainment site(general utilities) portal. And i have also ruled the ad networks out as they are of no use…( They degrade looks also)
    But is there any way out?
    Can we be able to nail out ads directly from Advertisers.(you also ruled that option out)

    Do you know any other way anyone is implementing to generate revenues?

  5. Adam McFarland says:

    “Aspiring Entrepreneur”,

    Thanks for reading. I’m not saying that advertising is a bad thing, just that relying on it as a primary source of revenue requires an absurd amount of scaling.

    If that’s currently your only revenue source, consider partnering with someone and drop shipping products, or offer a premium service, or sell an eBook.

    SportsLizard does have ads, and we do make money from them. But I think people would be surprised how little for our scale. That’s what I want to caution against.

    Also – we just sold advertising to someone huge in our industry. We didn’t get nearly as much as we wanted, but the partnership with them is worth it. Having contacts at their company and being able to announce that we are “partnered” with them will do more good than the minute revenue ever will.

    Don’t completely turn away from advertising. I just don’t want aspiring entrepreneurs like yourself to put all your eggs in the advertising basket – I think that’s when you can get in trouble.

    Adam

  6. Aspiring Entreprenuer says:

    that was really an eye opener, now picture looks clear to me.
    i will be coming back to you for more guidance thanks sir

  7. Eric says:

    Check John Chow’s latest figures – over $60/cpm. CRAZY!

  8. Adam McFarland says:

    Very interesting post. Yes $60 CPM PAGE VIEWS (not $60 cost per thousand ad impressions). Look at one of his pages and check out how many ads he has there? Not saying it’s not impressive (it is), but it’s apples to oranges with what I was saying. I was talking per ad impression, which from what I can tell he’s making less than $5 CPM for his ads (there’s easily 12+ ads per page…12 x $5 CPM = $60).

  9. […] got quite a response from my previous post about my issues with online advertising. I was actually quite surprised at people rushing to the defense of using advertising as a primary […]

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