Imagine if I came up to you one day with this business idea: Let’s buy a full page ad in the leading newspaper of leading cities and then hire sales people in each city to sell small ads within that full page, so that, the total of all ads we sell will be more than the cost of the full page ad we bought.
It’s a bull**** idea coz it’s just not possible to beat the big newspaper guys who have priced their pages in such a way that it’s impossible to do ‘trading’ on their product!
I use this example to de-mystify and de-bunk the biggest blunder of the dot com world – how start up entrepreneurs supported by their VCs encouraged new websites (and still do) to BUY ads online, in print and even on hoardings so that consumers VISIT that site – ONLY to sell ads back to them!
It’s a LOSE- LOSE model all the way.
Let me explain assuming that entrepreneur Desmond has just started ‘dressupmodels.com ’ a website that allows teens to dress up various models in different clothes as entertainment. In the process of dressing up etc, these teens are shown ads and this is Desmond’s revenue generation.
Cost when Desmond BUYS ads:
|
No of online ads bought on site teenager.com |
Cost per 1000 ads ( CPM) in Indian Rupees |
Money Spent on ads (In Indian Rupees) |
Click thru % on the ads |
Visitors who click on the ads but fall off on the way (lost clicks) |
Visitors who land up on Desmond’s site |
|
1000 |
150 |
Rs 150 |
1% |
20% |
8 |
Revenue when Desmond SELLS ADS
|
Visitors arriving from Teenager.com |
Pages that each visitor will generate | Ads shown per page | Total ads shown | Rate at which Desmond sells ads (CPM) | Revenue generated in Indian Rupees |
| 8 | 10 | 3 | 240 | 150 | Rs 36 |
There is a gross loss of Rs 115 (Rs 150 less Rs 36) purely trying to ARBITRAGE ads.
Sure, there are counter arguments that:
- Repeat visits from the same person will generate additional revenue.
- Viral traffic created by the first set of visitors (by them telling their friends to visit the site) will result in additional page views and ads and hence bring in more revenue.
Having been there and done that extensively, the shortfall is never made up.
Buying ads for selling ads is a business model for suckers.
The real success of websites that have sold ads has been viral and organic growth. That’s why you never see ads of Facebook or Orkut in newspapers or on hoardings. Sure, Yahoo advertises TODAY – but that’s after building a $6 billion business that now needs more Brand Building than additional traffic.
If this argument is true, then how does GOOGLE become the biggest success in online advertising in the history of mankind?
Because, MOST advertisers on Google sell THINGS on their websites – not ads!
Let me explain with the same example:
Cost when Desmond BUYS ADS on Google:
| Cost per Click on Google India | No of Clicks Desmond buys | Cost of advertising | Visitors who click on the ads but fall off on the way (lost clicks) | Visitors who land up on Desmond’s site |
| Rs 10 | 100 | Rs 1000 | 20% | 80 |
Revenue when Desmond SELLS GOODS on his site
| Visitors who land up from Google | % of them who PAY for virtual goods* | Paying users | Rs spent by them per time they pay** | Revenue generated |
| 80 | 10% | 8 | Rs 150 | Rs 1200 |
* Global norm of 10% paying for virtual goods (farmville)
** ARPPU (average revenue per user is US $5 globally) – reduced to US $3 for India
There is a gross profit of Rs 200 (Rs 1200- Rs 1000) in this model.
This IS the google model that allows millions of small business owners to sell boots, tents, handicrafts, jewelry and virtual goods to direct consumers via the advertising model. The entrepreneurs keeps tweaking their ad words ‘bid’ prices on Google so that the net cost of buying traffic results in a positive outcome via sales.
Advertising was invented to introduce you to new products and services and induce you to buy them. Stick to that rather than trying to resell what you bought!
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Alok,
Very nice post. You have nailed the problem of ad-based revenue generation model because many e-businesses are started with the revenues in mind and hoping that these tiny drops add up to an ocean one day (infinitely into the future). The dream is that when the ‘one day’ comes about, they need not have to spend on advertising because the traffic is expected to have multiplied many times in the few months of the website’s existence and every dime will be pure revenue.
So, like the saying goes- what is life without dreams?
Very well put sir
Its a question of sustainability…most websites are working on an arbitrage model where they drive paid traffic and then skim off profits from a higher eCPM they manage to monetize their own traffic …
Hi Alok,
got to this through a friend who passed it on saying it makes an interesting read, it surely does make an interesting read but not necessarily an entirely true one.
Yes of course those times are gone when you would buy in bulk on newspapers and resell them, but mind you those business models still do exist in the outdoor business where they buy in bulk and resell.
anyways the point that i disagree with is that you cant buy ads to increase your own ad revenue, with the changing landscape and buying capabilities where you buy only performance that changes the whole ball game, going back to your example of buying ads for dressupmodels.com if you change those to clicks like you would on Google it works perfectly for Desmond both in terms of sales and in terms of ad revenue.
also i believe you do not necessarily have to sell things via Google, we have seen perfect examples of sites both who have inventory sold out and who have too little inventory running SEM campaigns to increase their traffic to sell more ads
Just my POV
Cheers
Concept is really not workable for online things. But one of my friend is offering the news paper ads reselling to institutions in leading news papers at times, he is not mailing lots of profit directly, but through other services that he offer. Yahoo example is good.