Lesson One in the Online Ad Game: Size Matters

These are interesting times. One day, you pick up an article bemoaning (albeit gleefully) the demise of yet another dot-com with dire predictions for the future of e-commerce and, along with it, online advertising. The next day, the latest report on ad spending comes out showing continued growth at a very healthy clip with projections that online ad revenues will quadruple in six years. What’s really going on here? Is online advertising going to make you a millionaire or get you kicked off the island?

In a nutshell, here’s what the latest reports on online ad spending have to say. Yes, it’s true that a huge amount of online advertisers are dot-coms. And, yes, it’s true that dot-coms have to dramatically cut back on their marketing expenditures as times get tough. But the good news is that it’s mostly the offline advertisers that are feeling the pain. The metrics for online ad sales are great – more advertisers coming on board and higher per-company spending. What’s more, the average cost per thousand (CPM) is holding pretty steady at just above $30.

So, that’s nice but what does that actually mean for your site? Well, on the positive side, it implies that rumors of online advertising’s demise are greatly exaggerated. But, in reality, this information still doesn’t mean a whole bunch for the viability of getting rich off of advertising on your own site.

In this series, we’ll look at the fundamentals you need to consider before launching an online ad campaign. Today we’re going to start with the most basic truth of all: Size matters.

Literally every week, we get emails from readers who are looking for advice on how to get advertising going on their site. They report that traffic on their site is growing by leaps and bounds and that they want to hire an ad rep but aren’t sure how to go about it. And, as much as we hate to be the bearers of bad news, we often find ourselves in the unenviable position of having to tell people the hard truth – without sufficient critical mass, there is virtually no chance that they will have a viable advertising play.

First, let’s consider the media buying process. Buying online advertising is an extremely labor-intensive job. Often a buyer must secure a large amount of inventory – tens of millions of impressions – for a national advertiser in a very short period of time. To complete the buy using the criteria he or she is given, a media buyer may need to evaluate a dozen or more sites to make buys on four to five sites to get the right mix of quality, price, and volume. Each of these site evaluations and, ultimately, each buy is very time intensive as the buyer must request and receive proposals, evaluate those proposals, and execute the buy. For this reason, media buyers for major clients generally do not have the time or inclination to evaluate “niche” sites with low inventory levels. This means that only sites with sufficient levels of inventory are likely to be considered by media buyers as worthy of their time and consideration. And, assuming that the site aspires to more than run-of-site-level CPMs, it must have enough inventory in a given category to satisfy the needs of many buyers simultaneously. Generally, we recommend that a site have at least 8 to 10 million total page views per month to compete in a national arena unless its inventory is extremely targeted and valuable.

Then, there is the simple math of the situation. Say a site has 500,000 page views per month. Say that the site (unlike almost any site we know of) also gets incredibly lucky and sells 100 percent of its inventory. Let’s be really generous and say that it sells at $30 CPM. That would give the site total revenues of $15,000 per month. According to Industry Standard’s recently released compensation study, the average salesperson in the Internet industry is looking at a package of $117,000. That doesn’t leave much left over to pay all the rest of the expenses for running the site, let alone making a profit.

Lesson one: You must have sufficient inventory (or at least close to sufficient inventory plus very healthy traffic growth) to get into the online ad game in any serious kind of way. But wait, we hear you saying “Can’t I just use a rep firm?” Tune in next week for the hard realities on that front as well.

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