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Projecting Online Ad Revenue – A Guide for Tech StartUps

Posted by David Sonn on November 18th, 2011 at 6:36 am

As a consultant to tech startups, I’ve seen entrepreneurs planning online ventures confused when it comes to projecting advertising revenue. Having done ad projections with the benefit of live models from which to extract real data, I offer the following guidelines on how you can calculate revenue projections for your business plan.

Baseline Criteria:

Let’s assume that for Year One you will only use third-party ad-serving networks, instead of direct selling. This is as simple as adding their code snippets to your pages, to automatically feed their ads to your site.

Because it’s rare to find one service that can fill all your inventory, I recommend a primary service and a backup service. I also like to use a combination of two ad types: CPM (revenue earned per 1,000 ad views) and CPC (revenue earned per click). For the sake of these sample projections, however, we’ll focus solely on CPMs, as it’s easier to calculate.

In terms of ad providers, I’ve used Contextweb for CPM and Google AdSense for CPC. There are plenty of others to consider, but you may have to qualify for their minimum page view requirements, and that may not come until later.

Year One Assumptions:

  • 2 CPM ad slots per page
  • 80% of your inventory filled (a common percentage with a 2-service approach)
  • $1.20 earned per 1,000 pages viewed

You start by projecting monthly page views. Hopefully you have a beta site or some similar sites where you can review the average page views per visitor. If not, Compete.com will let you compare the number of monthly visitors for similar sites.

Depending on the type of site content, pages per visit can generally average as low as 2.5 to 3 pages per new visitor and between 8 to 10 pages for a repeat visitor. These numbers are based purely on my own experience managing sites.

Once you have a projection of monthly total page views, it’s time for simple math:

Total Page Views divided by 1,000 x $1.20 = Revenue Earned

You now have revenue projections for Year One.

Future Years:

When projecting revenue over Years Two through Four, increase your $1.20 per 1,000 page views first to an average of $3 CPM, then ultimately to a maximum average of $10 CPM. These are general guidelines and it’s best to be conservative.

To accomplish these increases in CPM rates, you may want to approach one of the larger or specialized ad networks to begin selling your inventory directly, or to even hire an outside sales team. You could approach a firm like 24/7 Real Media to employ their ad serving management tool and sales representation. You may want to contact them now and get their input as you start your projections.

As you build traffic and dramatically increase ad inventory, you will also want to analyze the benefits of adding an in-house salesperson or staff, with the goal of earning higher profit margins and providing better service, especially for advertisers coming to you directly. The base expense per sales person will range from $50,000 to $100,000 depending on the industry, location, compensation package offered, and the advertising and marketing support required. This does not need to completely replace your outside sales solution.

I hope this is helpful for those of you hard at work on a business plan for the next great dot com. I’d be curious to hear the input of others, those experienced in the ad selling game, to further this conversation.

21 Responses to “Projecting Online Ad Revenue – A Guide for Tech StartUps”

  1. A very basic, simple assumption that for the most part, I agree with. However, as I've always said over the years, if you want to make money online, Traffic is King. If you don't have the traffic, you're not going to make money. Unfortunately, many small StartUps have the "Field of Dreams" mentality and think if you build it, they will come - which, for the most part, isn't the case.

    For a StartUp, a $1.20 eCPM on a new site with lower level performance (being conservative here), is probably going to be gross IMO. Meaning, if you're using 3rd parties, you have to give up a share of the revenue, what's left would be less than the $1.20 per 1,000 page views. Essentially, your ads would be pulling down about $.50 - $.60 per unit gross. Let's do some math. If you are able to generate 1,000,000 page views per month (which is healthy for a StartUp), and receive an 80% fill rate; you're monetizing 800,000 page views at $1.20 eCPM at 60% rev share; you're looking at making $576/month. Even if the $1.20 eCPM is Net to you, that's still only $960/month.

    The game isn't easy. Be Different, build Traffic, Create Demand and bring sales In-House ASAP. If you can get to a mix whereby 60% of your inventory is direct sold at a blended rate of say $8 eCPM per 1,000 page views and another 20% is 3rd party revenue at a net of $.75; that same 1M impressions now nets you about $5k per month.

    • David Sonn says:

      Lance,

      Thanks for your response. Through a combination of CPM and CPC, I am seeing net revenue of $1.20/1,000 page views.

      You are correct that traffic is essential and many dot com dreamers have a misconception about how many page views is really needed for a venture to be profitable based primarily on ad revenue. Having said that, content is King when ad revenue is a key ingredient for profitability. Focus on quality, engaging content updated constantly and you will be headed in the right direction.

  2. David-

    Great comments. Here's a follow-on question:

    How much monthly page view tonnage (and/or unique users) do you think a publisher needs to have in order to justify hiring a direct sales team? Obviously, the precursor to direct sales success is having avails and audience that's big enough for a media buyer to even care about.

    • David Sonn says:

      Dan,

      there's not a simple answer but I would dig into the numbers and work backwards.

      1. Figure out what you would base expense you will incur for a sales person and the commission that you would pay on top of this.
      2. Compare the going CPM rate for your type of site ($5 to $10?)
      3. Analyze the average number of ad slots per page of your site
      4. Assuming the salesperson could sell 50% of your inventory, do the math to figure out how many pages you need to break even.
      5. Based on where you are with actual page views will dictate if you have enough page views to warrant hiring someone. If you don't, the focus may need to be on content and traffic first.

  3. Jay says:

    How does the number of ads per page view impact the CPM calculation? Does it produce a multiple of the $1.20 mentioned?

    • David Sonn says:

      Jay, I based my calculations on 2 ads per page since that's what I have in a live model. You could also base it on 3 ads/page and run with $1.80. I wouldn't go beyond that as it could compete with content and negatively affect user experience. Did this answer your question?

      • Jay says:

        Yes, that makes sense. I understand how adding ads decreases both the effectiveness of the ad and the UX. I was wondering how page CPM related to the number of ads on it. Thanks.

  4. David Sonn says:

    Yes, of course you can fit more than 2 ads on long pages but you can also compromise the value to the advertiser and the quality of the user experience if you load up a page with too many. I used 2 ads as a conservative assumption for which I had real data that would work in all scenarios for doing the calculation. I needed to state this so it made sense to everyone.

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  11. Lu says:

    What would you average (realistically) a new start-up company page view per month for the first year and each year successively for the first 5 years?

    thanks,

  12. TheHTMLCoder says:

    Lu, it really depends upon the marketing strategy for the company although there might be other factors but the main thing for any company that is new without any contact it comes right down to marketing how good you are at making contact, doing search engine optimization. First few months might be slow but as time passes by like 6 months you will have some traffic and by the end of the year you should have enough traffic to make a good enough income but it all depends upon the market / brand as well that you are going after.

  13. Fernando says:

    So for the next years, you said to increase the CPM de $3 for example, so you would get less money?

    This is changed

    Total Page Views divided by 1,000 x $1.20 = Revenue Earned

    by

    Total Page Views divided by 1,000 x $3 = Revenue Earned

    Is that correct?

  14. Blair says:

    What is the % for a startup leadership development type business?

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