Web Communities and the Art of Making Money

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3. The Advertising Model

By Robert Nagle
Summary: Part 3 examines what role advertising can play in supporting a website. It also looks at the numbers.

Banner Ad Skepticism

This brings me to the final business model (almost) for online content producers. Advertising. At first, websites thought that banner ads and banner exchanges would be sufficient to keep a site afloat, but it quickly became clear that the clickthrough rates are fairly low and not a particularly valid way to measure ad effectiveness. This is especially true for advertising only tangentially related to the site in question. In addition, ads that intrude on the web experience (pop ups, pop unders, dhtml animated ads, audio ads) create such a distaste for the advertising medium that they have driven other companies to develop special software to pluck them off web pages. And if your company's popup disables a visitor's browser for 3-5 seconds, why would that visitor have positive feelings about your products?

Content sites offering "no advertising" as a perk of membership might be more willing to accept flashy/annoying advertising as a way to goad people into paying. But it's hard to believe that a media site would risk alienating readers with intrusive ads. On the other hand, viewers interested enough in the content might be willing to suffer though anything.

In the era of post-boom skepticism, people are skeptical of business models relying on advertising revenues. And for good reason. Because the number of web pages is increasing exponentially, so too will the number of potential venues for advertising. That will have to drive advertising revenues down (although it will be good news for buyers of advertising). But this will not necessarily drive down ad rates. Regardless of how many websites imitating Slashdot.org appear on the net, if Slashdot brings in a million visitors a day, then its revenues from advertising will not decline one bit.

Effective Reach

One advertising study suggests that larger media sites have more effective reach than smaller sites for the same number of views.

Smaller sites with less traffic not only have the ability to earn more total revenues from advertising, they can also charge higher rates. Why? Suppose a company paid for 50,000 ad views each on two sites. Site 1 attracts 20,000 visitors a day, while Site 2 attracts 50,000. All other things being equal, 50,000 adviews on Site 1 will probably reach more unique people than on Site 2. Smaller sites can command premium rates only by demonstrating to advertisers that their market is very specialized, (say a group of network security professionals) and that ad views won't be wasted on eyeballs not interested in network security.

And although marketing research so far has shown web advertising to be more effective in establishing brand recognition than in increasing web traffic , websurfing technology allows better tracking and statistics about ad effectiveness. In traditional print media, one could only surmise that advertising resulted in better sales by looking at before and after. A person who sees a Campbell's soup commercial might be more likely to buy a can at the supermarket. But it was still only a guess; sales figures could always be muddied by other factors unrelated to the advertising campaign. Web advertising, on the other hand, makes purchases possible with a very simple clicks. That's not true for every kind of product. Maybe a person might make an impulse purchase for a book by clicking on a banner ad. But in another case he might click on an ad simply for information (like getting an auto insurance quote or finding out about web hosting plans), not to make an immediate purchase. In that case, clickthrough rates would merely provide a clue about the ad campaign's success. But a very important clue.

Doing the Numbers

Several factors argue in favor of an advertising model to support web community sites. Websites can gather and analyze demographic data fairly easily. And yes, it is true that the explosion of web sites means more competition for the finite amount of advertising dollars (although that will be accompanied by a dramatic increase in total web surfers as well). But a global audience allows good content to increase traffic in a rapid period of time. For online services, the pool of online customers transcends national boundaries. If one wanted to buy a programming tool or streaming video services or adult membership, it really doesn't matter which country the company is located at. On the other hand, a website with a wide readership in a specific geographical area might attract ads from small business people unable to afford advertising in the mainstream media.

Content Sites and Membership Numbers
Possible Revenue Strategies $50,000 Annual Budget $100,000 Annual Budget $200,000 Annual Budget
100% from Advertising 70,000 daily traffic 140,000 daily traffic 280,000 daily traffic
50% from $20 Membership;
50% from advertising
1250 Signups + (35,000 daily traffic) 2500 Signups + (70,000 daily traffic) 5000 Signups + (140,000 daily traffic)
75% from $20 Membership;
25% from Advertising
1875 Signups (17,120 daily traffic) 3750 Signups (34,240 daily traffic) 7500 Signups (68,480 daily traffic)
50% from $50 Memberships;
50% from Advertising
500 Signups/70,000 daily traffic 2000 Signups/140,000 daily traffic 4000 Signups/280,000 daily traffic
75% from $50 Membership;
25% from Advertising
750 Signups (17,120 daily traffic) 1500 Signups (34,240 daily traffic) 3000 Signups (68,480 daily traffic)
100% from $50 Memberships 1000 Signups 2000 Signups 4000 Signups
100% from Memberships @ $20 memberships 2500 Signups 5000 Signups 10,000 Signups
Assumptions: Adviews can be sold at $2 for 1000 adviews; Membership rates are annual. Annual budgets don't include taxes, capital expenses, depreciation, etc.

Here are some things clear from a sketch of the finances. First, unless the number of local clientele is massive, a web community portal is unlikely to survive on local traffic alone. Second, whatever the ratio between membership and traffic, it's clear that the first and foremost thing is generating traffic. Even if we assume a low budget web community supported partially by memberships, you're still talking about needing 35,000 visits a day. If there's about 750 million web surfers out there with enough comprehension of English to surf web pages , the potential for increasing traffic with good content is huge. On the other hand, let's not kid ourselves with numbers. Aside from Western Europe (whose society resembles America's in several important ways), it's unlikely that such people will sign up in droves or that advertisers will pay for such traffic at premium rates.

The economics of it seem pretty dismal. But the diminishing cost of running a website in general might partially offset the declining value of ad views. I'm not talking only about the hardware, software and bandwidth, but also the ability to acquire services at a lower cost and locate advertisers. And remember my previous point: if a site can maintain the same amount of traffic over time, it's unlikely to lose advertising revenues.

NEXT: 4. Corporate Boards: Feisty or Soulless?

Robert Nagle is an available Texas writer who has written essays about Kafka and Eastern Europe. He maintains a technology weblog and an Asian Culture Weblog.


Additional Resources
  • Text ads have emerged as a less intrusive method of advertising. An article on text-based ads by Michael Hurwicz in May 2002 New Architect talks about how small community web sites have used textads to their advantage. The revenue isn't considerable (the sites that successfully use textads rarely raise more than $20,000 a year), but one frequently overlooked point is that most of the advertising comes from community members who regularly read the site. As a result, the textads are more likely to interest community members because they come from members themselves. In a sense, you are buying a service and making a donation at the same time. An open-source version of textads is also available.
  • Requiring online registration can yield interesting demographic information for the website that can help these sites set more realistic rates and allow advertisers to better target readers. An OJR article on media sites requiring registration shows how online registration can give more accurate traffic reports and give a better idea of how many visitors are out of the state or country.
  • The article Pyramidscheme.com compares the speculative buying of advertising to that of a pyramid scheme. Even if this article is not directly relevant to the topic at hand, it underscores the subjective valuations given to advertising and how valuation might fluctuate according to perception of effectiveness and reach.