It’s becoming increasingly clear that the generic advertising based web 2.0 business models are struggling, and I am wondering if lead gen business models are a much more effective model for the current downturn. Some of my partners are saying that 100 million in the new 10 million, as in a startup now needs 100 million monthly views to generate venture style revenue returns based off of a pure advertising based business model. While this is a bit of a cynical joke, there does seem to be statistically valid slipping in online CPMs, particularly around untargeted display advertisements. Targeting definitely helps, and some startups that I interact with are earning $25 to $60 CPMs… however, these are for highly desirable user groups. If you really think your startup has better targeting but doesn’t have huge users maybe you should consider using lead generation to do the monetization yourself.*
My general thought process is as follows:
- Targeting requires work and advertisers can be lazy. Most web 2.0 startups have operated under the assumption that the advertisers would bear the brunt of this work. Facebook’s ad engine is an example of this – the advertiser has the ability to target users with pretty amazing specificity. However, the system isn’t particularly user friendly, and takes effort (as I discovered when I attempted to use Facebook’s engine to drive traffic to Startable.com.) However, despite the site’s huge user base advertising revenue appears to be a bit lower than the hype… Maybe some of this is because advertisers aren’t up for spending the effort to do this targeting for all of their campaigns. I have spoken to several advertising executives (at brands and agencies) who are thought true interactive advertising thought leaders, and these advertisers are willing to put the time and effort into targeting ads. However, I get the feeling that most advertisers are lazy and would rather just buy the million views they want on the TV show that they think that their customers watch.
- You need huge volume to target. It’s not worth an advertiser’s time to target an ad at 1,000 viewers, or even 100,000 views. Most large advertisers want to hit millions of viewers, and unless your startup has millions upon millions of viewers then an advertiser trying to do targeting will end up with too few people to justify a campaign.
- Finally, the economy is not happy right now. Advertisers may be more focused on efficiency than before, and the most effective spend is likely a cost-per-action (CPA) vs. the typical cost per thousands (CPM).
Is lead gen the solution? If you really have such a great targeted user base, why don’t you try to monetize them yourself? You know your user base better than anyone else, and you are likely more willing than anyone else to do the targeting. Finally, advertisers may be more willing to go the CPA route since they are possibly more willing to give away good $ for anything that can grow their topline in an economic downturn.
Anyone have any thoughts? Does this make sense?
*secret thanks to the CEO who I spoke with recently about this – you synthesized a bunch of my scrambled thoughts in a very structured way!
October 22nd, 2008 at 8:45 am
Healy – Jeremy Liew’s blog talks about some of this here: http://lsvp.wordpress.com/2008/10/13/which-companies-might-prosper-in-an-ad-recession/
The rest of the ‘evidence’ comes from the growth of companies like ebay, amazon and expedia during the last downturn. I’ve heard first hand from some of these companies that retailers are more willing to pay to prop up their top line during a downturn than at any other time.
Philip
October 22nd, 2008 at 11:28 am
It definitely makes sense for social networks to include performance based models such as CPL (Cost-per-Lead) advertising in their media mix. With eCPMs from CPM pricing models at an all time low (27 cents in 3Q 2008) it’s time for publishers to experiment with pay-for-performance pricing models. In addition to what you have mentioned there are several reasons that justify this shift:
1. It’s what advertisers want: The Internet Advertising Bureau Report showed performance based models exceed CPM pricing models for the first time – and in a slow economy this trend will undoubtedly accelerate.
2. Publishers can earn higher eCPMs (some of our publishers earn as much as $75) by monetizing untapped registration paths
3. Many products exist to help publishers increase revenue through pay-for-performance advertising: Our Pontiflex AdUnit X banner helps consumers send data to advertisers without having to click through to a landing page. Consumer information gets sent on the backend while the user continues to stay on the page. Publishers stickiness increases, while advertisers can pay for performance, while being able to brand.
All in all the reason advertiser dollars will move towards pay-for-performance models is the same reason advertisers dollars began to move offline to online in the first place – increased ROI. It’s a trend that publishers should capitalize on.
October 22nd, 2008 at 4:24 pm
Philip – Thanks for the link; Jeremy’s post is interesting. I do notice a common thread of the companies that were able to thrive during the last recession (he cites Expedia, Zappos, Quin Street, Lending Tree, Lower My Bills, Netflix, Classmates.com and Ancestry.com): most were taking an industry or process that was generally offline and taking it online.
Zephrin – Your point number 2 is quite powerful. Email’s are quite powerful if you know what the person was trying to sign up for, although the results you cite are quite spectacular. However, a good email could be the gift that keeps on giving… I also like the idea of the product that you mention in point #3.
Healy
October 23rd, 2008 at 7:24 am
I’ve heard exactly the same as your points 1 and 2 from ad executives too. What this tells me is that web B2C companies have 2 potential games in the medium term with advertising to get VC like sizable revenues : 1) if you have a broad user base, you need huge volumes or 2) if you have a targeted (and desirable) user group, you can have a niche play. Most web B2C companies fall into the first category but very few will get the required scale… It’s no surprise: just look at the dynamics of other mediums as TV or newspaper.
I don’t know if CPA resolves these issue. You might get over the advertisers’ laziness and improve revenue potential – it’s an optimization. However, you don’t solve the scale or targeted desirable user group issues to reach sizable revenues.
October 24th, 2008 at 1:58 pm
Wallen,
I agree that the scale issue remains – if you are going to wildly successful you’ll need a large audience. However, it may be worth YOUR time to target while it won’t be worth an advertiser’s time. And yes, it is all predicated on having desirable users to target…
Healy