Rule #9 – “Building community” and plastering it with Ads is not a business strategy

What could be easier then building some cool web 2.0 product that attracts people far and wide? They come to the site, hang out, conversate, post things, share things, so on and so forth. Then, once they are hooked, you’ll start introducing subtle advertising powered by Google or AdBrite. Maybe, with the right luck along the way you can find advertisers on your own and charge thousands of dollars for their banners to appear. You know, Yahoo!’s front page top banner reportedly goes for a million dollars a day. A MILLION A DAY! With a million a day, you no doubt could build the most awesomest web site ever.

Despite what you might have heard, relying on advertising to power an internet based business is akin to thinking that you can ride a rubber dingy across the Atlantic just because it floats. The fact that advertising in all of its various forms is capable of generating revenue does not mean it is capable of generating all the revenue you need to keep the power on, much less make your company profitable.

In a future post, I’ll offer some alternatives to the ad model, but first we need to understand the problems with the “build community, plug in some ads” strategy:

1. The Monetization of Advertisements is painfully low. If you do not know this lesson yet, you will learn it soon, and it will likely put you in a very bad mood. Advertising is most often measured by CPM, or “Cost per 1,000 impressions.” A pretty standard return for a web-site serving Google Adsense (the most popular and arguably most effective ad-serving platform) is about .10 CPM. In other words, 1 MILLION impressions would net you $100. Free accounting advice: make sure you don’t spend it all in one place. Furthermore, there is a nasty double-edge sword at work against you: if you build a huge community or readers/users/viewers, the chances are great that advertising will be less specified and thus less effective. If you build a niche site that can serve more expensive, well-received ads, you likely won’t have enough users to see it really pay off. So, a million impressions at .10 per thousand or 10,000 impressions at 1.0 per thousand, you still won’t end up very far in the black.

2 . If you’re still reading, take heart! Things are about to get much worse for your ad-supported community. The effectiveness of advertising diminishes over time if your community remains stagnant. In other words, the more someone visits your site, the less likely they are to continue clicking on the advertising that is provided to them. After a while, they may well become “blind” to the advertising on the page in the same way that people instinctively channel-surf or get up to get something to drink when a commercial break comes on television. This presents a problem no matter how you shape it. If Google Adsense ads never get clicked on, you won’t earn a dime. If you have paid advertisers and can’t demonstrate that their ads are making an impression, they’ll quit advertising on your site.

Some of the most trafficed websites on the internet – Facebook, digg – reportedly find themselves struggling to monetize their user base through advertising. The point is that having lots of users is no guarantee that they will respond to advertisements.

Can a website become profitable – VERY profitable – via advertisements alone? Absolutely. Sites like TechCrunch reportedly garner close to 5 digit prices for a month’s advertisement in the sidebar. Other sites no doubt have found money in advertising. That said, these example are few and far between and thinking you’ll some how buck the trend of thousands upon thousands upon thousands of sites that have failed with the ad model is naive. Yes, there are exceptions to the rule. Just don’t forget “the rule” got to be “the rule” for a reason.

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3 Responses

  1. Ah, poignant and precise. But you know every industry has its “get rich quick” mentality, no? Real estate has “no money down”, Hollywood extras are going to get “picked up by the director”, and online is the “ads will get us rich” or “eBooks are the way to wealth”. Blah.

    Perhaps the winners out there are simply the ones that have a decently good plan and are working hard consistently and persistently to make their goals? This just seems to be a universal law of success from what I’ve been able to see thus far in life. More posts like this and you’ll be right up there too!

  2. Thanks BG. At the risk of insulting some very smart and successful people, I’ve always thought the way to make something have true worth is to charge for it. While using ads for revenue seems convenient and agreeable to the user, if your product, site, or service is worth a darn, enough people will be willing to pay for it.

    In my opinion, Digg is a great example. I have no idea how much revenue they are generating, but I can’t help but think they’d be further in the black if they charged a nominal fee for user accounts. Something like $5 a month for the networking and friend features they have built in that are so popular. While I could be wrong, I have a hard time imagining that google ads at the top of the page are generating $5 per registered user per month over there.

    I’ll have a longer post shortly on ways to monetize web services and applications.

  3. Hey Colin,

    Good article, I’ll be looking forward to your next one on monetization. I’m going back and reading your other posts as we speak. Keep it up! (Met you over at Techquila Shots)

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