Friday, April 4, 2008

Evaluating Internet Ad Revenue Potential

The story of is astounding. As of October, 2007, this one man dating web site was generating $3.5 million annually solely in online ad revenue (expected to go to $10 mill in 2008). As an internet entrepreneur, I applaud Markus Frind as one man wrecking crew in the online social networking space. But something else caught my eye in regard to POF--it's high click through rates. Companies such as POF which rely mainly on online ad revenue get paid when visitor clicks on an ad. Therefore, the most important metric for the company is not number of daily unique visitors or even page views but, rather, how many ad clicks. A web site with a high click through rate can generate larger revenue on a smaller number of page views than a site whose click through rate is lower. "Markus told me that per page view, Plentyoffish has 5-10 times the click through rate of Facebook. So by his calculations, POF's 1.2 Billion page views per month is the same as 5-10 Billion Facebook page views per month." Link.

To be sure everyone is one the same page, "click through rate" is percentage of online ads that are clicked on by a visitor. For example, a web site with 1000 daily online ad views and 12 clicks per day has a click through rate of 1.2%. If you have a Google Adsense account, they give you the click through rate in the ad campaign reports. Frind argues for a valuation for his company using Facebook as a baseline and each company's monthly clicks. Good luck Markus.

On the topic of business plans, it is important for online companies who intend to rely in any meaningful way upon online advertising to discuss click through rates in making your financial projections. Hopefully, your company has past operations data to use for establishment of click through rates (CTR) and ad revenue per thousand ad impressions (CMP). Thus, when projecting future revenue for the business plan, you will possess historical revenue percentages that can be applied to future traffic projections. Get a solid projection on future page views then use the historical CTR and CMP to project revenue. For example, let's say your online business is a social networking site for Wiccan priests and priestesses. You're about to expand to other pagan faiths. Current daily page views are 20,000 (one ad per page) with CTR of 1.2% and CMP of $8. Thus, ad revenue is $160 per day. I have no idea the actual number but let's say there are twice as many Celtic worshipers as Wiccan in your target geographic market (North America). Thus, within one year, you are projecting 40,000 daily page views on your sister Celtic site (twice the Wiccan number) with combined daily ad revenue of $480. The historical CTR and CMP rates are what give your projections teeth, thus, helping the entrepreneur sell his business to investors.


Anonymous said...

Interesting article that highlights the importance of CTR. Could you clarify what you mean by CMP of $8. How do you get from 240 clicks per day to $160 revenue? Thanks

jjray said...

"Could you clarify what you mean by CMP of $8."
Revenue of $8 per 1000 ad impressions served (as opposed to revenue per click or 1000 clicks).

"How do you get from 240 clicks per day to $160 revenue?"
Unless I misunderstand the question, the hypothetical was 20,000 ads served per day with a click through rate of 1.2% and revenue per 1000 ads served of $8. Thus, ad revenue is $160 per day (20 x $8). Granted, $8 CMP is high but not unheard of. My commercial site has a CMP this high but it is due to high ad rate sections such as plastic surgery and divorce lawyers.

Sharat said...

How does the CTR fit in the calcuation? Do you have to charge a PPC rate as well (say $.50)? The number of impressions (20,000) is multiplied by the CPM ($8)= $160. The number of clicks (240) is multiplied by the PPC= $120. Is the total revenue therefore $280?

juliab33 said...

I definately think its worth while having adsense on your website, but the majority will not earn anywhere near that much on adsense alone