Get a ton of traffic, just sell ads, you’ll make a fortune

Over the past few years, I’ve run across many entrepreneurs who have the next “big thing” and their business model is advertising. What these eager entrepreneurs fail to understand is that digital advertising – particularly in the consumer web – has become a commodity business. While many a fortune has been minted in digital advertising on the consumer web, this is the exception, not the rule. For every mega-success story, there are probably a thousand consumer websites that just sputter along, barely covering the cost of running the site.

They key: high-value audience

If you’re reading this, you’re undoubtedly interested in what it takes to make a successful advertising business.  The key is really the audience that you target, it comes down to a high-value audience – that is an audience with a  high lifetime value and hard to target through other means.  I’ll describe this in greater detail below.

Why is the consumer web a commodity business?

First, let’s step back to where the problem lies with the consumer web.  As I’ve already mentioned, advertising on the consumer web is a commodity business. While there are many factors that cause this, two primary forces driving this today are A) over-supply of consumer advertising choices (Google is a huge part of this, but also an abundance of digital media properties/channels for selling ads), and B) the new trend of programmatic ad buying in which automated exchanges make the price paid more efficient, which will continue to drive ad-revenue lower for the website owner / publisher.

What to look for in building a high-value audience

The question therefore becomes, is digital advertising a worthy option for creating a business? Yes. But, the key is to find a niche audience that is valuable to a potential advertiser and is hard to target broadly.

As an entreprenuer starting a new business/product with an advertising business, focus your efforts on a few key attributes:

1. High-lifetime value of a customer

Put yourself in the marketers shoes for a minute – marketer is the “buyer” of your product, i.e.: audience. As a marketer, your basic formula is this: Customer Acquisition Cost + Cost of Product < Price of Product. In simple terms, your customer must pay you more money than what it costs you to produce and market the product.

With consumer products, margins tend to be very thin. This means the profit on the product is low, which means the marketing budget per product is low. Let’s look at a few examples.

Let’s assume you’re doing a simple marketing campaign using some industry averages ($10.87 CPM, .11% click through rate, 3% visit to purchase conversion rate). You purchase a 10,000 impressions campaign – which is small, by the way.

Imagine, as a marketer, you make a product that sells for $20, it costs you $10 to produce that product. Your margin is $10. Your financials for a single sale on your 10,000 impression campaign look like this:

1

Not good.

A better option is to focus on customers who have a high lifetime value – that is, a customer who will spend a lot over their lifetime with you. That could be a single sale; however, it can also be a customer that continues to spend over the course of a few periods, years for example. To illustrate the point, consider a subscription type product where a customer might spend $100 per year for, on average, a total of 5 years. In cases like these, a marketer can afford to spend a lot more money to “acquire” that customer.

The example might look like this:

2

Looks a lot better.

In another example, consider a company that sells iOS App development services. The average cost for an iOS App is $34,000. An iOS Developer / agency can afford to spend a lot of money to reach one customer:

3

What does this all mean? Well, it’s easier for the marketer to buy ads – the margins are there. For you, the publisher, it also means you can afford to charge more for your audience via advertising.

2. Hard to target audience (outside of search keywords)

While high lifetime value is important, there is another dimension to consider – that is, what options does the marketer have to “reach” the audience. Think back to your marketing 101 class, marketing is about targeting the right product with the right message, to the right audience, at the right time.

This isn’t rocket-science, this is what has made Google’s ads so effective – I am a marketer trying to sell wedding dresses, if someone types “Wedding Dress” into google, there is a good chance she is looking to buy a wedding dress. The key? Google has, rather efficiently, brought a prospect to a marketer based on what she is interested in/looking for.

While Google can do this in a multitude of industries/products with keywords, there are many other options for a marketer to reach the “wedding dress” demographic (women between the age of 20 – 35). A few examples might be: fashion blogs, wedding magazines, facebook demographic targeting (plus keywords), bill boards. The demographic is broad, you’re likely – albeit in a less-targeted way – to find prospects with simple demographic cues. As we’ve said above, broad supply of options makes your consumer media property less attractive, more of a commodity.

Thinking of the examples above, people who spend a lot of money on a particular product, the next attribute to consider is “hard to target based on traditional demographics”. Consider the example, again, of someone who wants to build an iOS App. Who might you target? There are a few job titles you can consider – such as marketing managers, but you cant easily turn to mass media to find this person. Therefore, someone who is difficult to target based on standard demograhpics – job title, age, etc – focus on someone who is only targetable based on what they are searching-for/reading. Which means, while there is a broad supply of advertising options, they are likely not as effective as a website that “teaches” people what to look for when hiring an iOS Developer.

In conclusion, digital advertising – particularly mass consumer advertising – has been increasingly commoditized because of great supply of options and downward pressure on what marketers will spend to reach a consumer. If you’re considering creating a startup focused on an advertising model, look to attract a community who A) has a high-lifetime value to the marketer (company) who wants to reach that person and B) is difficult to target based on standard demographics, but is better-targeted by the type of actions they exhibit on the web (ie: searching for specific articles/terms).