Attention Startups! Advertising Is NOT A Business Model.

posted in: Business | 1

The Advertising Business Model

fail-advertising-business-model

Traditionally, newspapers and other print media earned money through advertisements. Publishers believed that the Internet was a golden opportunity with scalable reach and minimal distribution costs. What publishers didn’t count on was the limitless amount of free information and news pouring in from every writer with an Internet connection. The major publishers no longer controlled the flow of information and online advertising rates slowly declined.

There’s a long-term belief that profitability can be achieved by “just getting users” using freebies – like news, products and services, and then monetizing solely with display ads. However, companies are slowly realizing that in order to remain profitable, they have to create multiple income streams and diversify.

Companies like Google and Facebook are the exceptions to this rule. With Facebook’s more than 1 trillion page views per month and Google’s more than 180 billion ad impressions each month, they can generate enough revenue from ads to sustain their business model. My last company planned on monetizing solely through advertising.  We had tremendous traffic, but at the end of the day we weren’t Google and we scrambled to find a new business model.

Digg

digg-advertising-business-model

Digg was created with the idea of empowering people by allowing them to post news stories that they found interesting. Digg tried everything possible to monetize. When it gained popularity, its creators made the decision to enable Google Adsense to earn money for the company. However, even with the massive amount of traffic it wasn’t enough to keep the company profitable.

Reddit

Reddit is another company that thought about generating revenue by putting in more ads on their site. Although the site gained success through their Ask Me Anything (AMA) campaigns that allow users to ask questions to celebrities– like President Barack Obama, the large amount of traffic meant upgrading their existing IT infrastructure and additional storage/bandwidth costs.

Reddit CEO Yishan Wong admitted that incorporating ads in between pages would compromise the user experience.  Aside from that, he stated, “See, the problem is that if your site is funded primarily with advertising, then you are beholden to your advertisers. If your users choose to post something politically or culturally controversial, you come under editorial pressure from advertisers to remove or modify it…This eventually results in a watering down of the true, authentic content on the site (remember Sears?). It’s one of the reasons Digg failed.”

With this in mind, instead of putting more ads on the site, Reddit began promoting a Gold membership plan to its users – where users who purchase this plan have exclusive access to discussion groups and forums.  Sites like Techdirt, 4Chan and Talking Points Memo are also attempting this strategy.

Other Business Models

Subscription Services

There’s no business model as straightforward as paid subscription. You have the number of subscribers and you have the subscription price. Then, just do the math. The challenge in a subscription models is presenting content that’s compelling enough to draw the potential subscriber’s interest and gain their trust. That’s where freemium comes in.

Freemium

This is a model that offers basic services to its users. If the user wants to have access to additional features, they are charged a fee.

Trial

This model is similar to freemium except that instead of withholding features, the service expires after a certain amount of time. The user must pay if they’d like to continue to use the service.

Microtransactions

Microtransactions, also known as in-app billing or in-app purchasing, is a business model that allows users to purchase virtual goods. Amounts involved are usually small, $1 or less, but they often add-up due to the volume.

Affiliate

In this business model, a company earns through payments made by the referrer’s site to the affiliate site. This has been touted as the business model that is “6 times more valuable than ad revenue.” Here, the approach is more targeted. If someone were interested in social media, he would logically visit sites about social media. The site’s owner can present an affiliate link related to social media that can be clicked by the web visitor. If they make a purchase through the link, the site owner makes a commission.

 

Ads placed on websites, no matter how strategic they are placed, are often ignored. The more ads you place, the more they turn visitors off. It’s all about figuring out how to present interesting offers to visitors that will result in a transaction.

One Response

  1. Ram Viswanadha

    Agree about Advertising is a business model at scale. Which in turn means that you need have viral network effects to grow fast and reach that scale.

    Disagree with Micro-transactions. It has the same problem. It needs scale to be meaningful. A great post by Fred Wilson http://www.avc.com/a_vc/2013/01/mba-mondays-revenue-models-transaction-processing.html

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