The Advertising business model

In today’s Western digital businesses, advertising is the main source of revenue for websites, mobile sites, mobile apps and anything in between:

In the first quarter of 2013, Google advertising revenue was $11.9 bn. Advertising revenue was 92% of Google’s revenues for the quarter.

For the fourth quarter 2012, Facebook’s revenue from advertising was $1.33 billion, representing 84% of total revenue.

Personally, I believe the advertising industry is in a bubble which is ready to burst. It is a semi-self-fulfilling industry that has been growing at a rate out of proportion to the businesses revenue which support it.

Organic revenue growth of the big four advertising companies, 2010-2012
Organic revenue growth of the big four advertising companies, 2010-2012. From Statista

Nevertheless, mobile app and web site owners continue to push more content, games and other features, funded by the advertising market.

This post is the third of a multi-part article on methods to monetise large digital audiences. The advertising model can be used for any size audience, and any level of content quality. It is by far the easiest and quickest way to earn a quick-buck from an audience.

There are several types of advertising. These include banner and MPU ads, text ads, video ads, wrap arounds (for instance on both sides of the main content column on a website), [window or lightbox] pop up and pop under ads. The list goes on and on. Essentially these formats are all an evolution of print or television ads.

There are several ways to charge for these ads:

  • CPM – Cost Per Thousand displays. Advertisers will pay for the ad, whether or not users did or didn’t click on the ads, or if one or more ads appear on the same page. These types of ads may even be displayed in an area of the page which can’t be seen (i.e. beneath the fold).
  • PPC – Pay Per Click. It was Google who made PPC the industry recognised advertising model that it is today. PPC means the website displaying the advert only gets paid once a user clicks on the ad. If the ad is shown millions of times but never clicked, there is no cost for the advertisement.
  • Classifieds. In this model, a user, often an end customer, will pay a website for their ad or announcement to appear. It is independent of the size of the readership.

Due to the size of the advertising market, there are a number of technologies and platforms to support advertising. These fall into two categories:

  • Cross industry, generic ad sales platforms such as Google’s AdWords. These platforms make it simple for any advertiser to create and pay for advertising, although Adwords has become more complex in recent months. Businesses with literally any size budget can use the Adwords platform.
  • Facebook's targeted advertising: This screenshot shows there are around 3,000 Facebook parents, aged over 18, based near London who like horse riding.
    Facebook’s targeted advertising: This screenshot shows there are around 3,000 Facebook parents, aged over 18, based near London who like horse riding.

    In house platforms. The most popular example of these proprietary platforms are Facebook and Twitter. Advertising can be highly targeted (see the screenshot) or broad. These platforms are often developed by the website owners themselves, or white label solutions are also available for owners with less technical capabilities. With in-house platforms available, there are now third-party products (e.g. Salesforce.com’s Buddy Media) which enable advertising agencies or large brands to use a single interface to manage campaigns.

The key advantage of these platforms is how they are self-service. Any business (aka advertiser) can create and pay for an advertisement quickly and easily, with any sized budget. Previous to Google AdWords in 2000, it was very difficult for small businesses to advertise – they were forced to go to advertising agencies.

One way to clear unsold inventory
One way to clear unsold inventory

One age-old challenge of running an advertising model is supply and demand. If a website operates its own advertising system, they need to make sure there are enough advertising opportunities to display advertisements. If there are too many opportunities and not enough ‘sold inventory’, the options are either to remove ad spots, or to sell the remaining inventory to third parties. There are a number of companies who specialise in this low margin and un-targeted, unsold inventory.

The topic of this series is monetising large audiences. Whilst advertising can be used in conjunction with other forms of monetisation, it requires a strong brand to use advertising with other forms. For example, Sky television is able to charge a monthly customer subscription, and still show television adverts. On the other hand, Spotify has adverts for users who don’t pay, and removes all advertising once they do subscribe – which we’ve covered in the Freemium article.

One last point before we discuss the future – Google and Facebook, with their huge audiences have proven that it’s possible to make large profits from providing a platform for millions of small businesses to each spend small amounts of money. This is different to TV advertising where a relatively small number of large companies advertise.

The future

There are two scenarios for the future of advertising.

The first, which is already in place on some digital properties (the term used by the industry for a website, mobile site or mobile app), is for highly targeted, personalised advertising. There’s no point showing me an advert for the price of pizzas in the supermarket – we don’t buy pizzas from supermarkets at home. However, if I see adverts for the latest bicycle, the advertiser has my undivided interest.

This will become more mainstream, and much smarter. Advertising systems will be able to know whether I usually buy stuff for cash, on a credit card, on a credit agreement, and make the offer ever more personal.

The second scenario comes back to the start of this post – the advertising industry is potentially too big. We’ll see organisations want to increase revenue from real money and not rely on advertising. We could see Facebook buy eBay, or launch their own ecommerce offering, or Facebook may introduce a person to person payments system – either way, we’ll see companies who solely rely on advertising on one form or another, sell products for real cash.

 

For other monetisation methods, view the complete list.

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