You will probably never make millions from online advertising, no matter what type of website you run. However, if you are able to create a site and attract a reasonably sized and loyal audience, you can sell the site to a bigger player who can exercise the advertising potential. That’s how much of the internet millions are made.
Let’s talk about some extreme examples.
Facebook has a valuation of more than a 15 billion dollars as a result of a recent 5% 1.6% purchase by Microsoft. There has been speculation about how much money Facebook was generating in advertising revenue prior to this, but the numbers are actually irrelevant. Microsoft saw value in the audience. How, when and if that value will ever be realised is frankly Microsoft’s problem, not ours. What we care about is that if we can build a website with a focused and dedicated audience, there will undoubtedly be a buyer for it. The bigger the audience and the focus, the bigger the price ticket.
Similarly, Google bought YouTube for $1,65-billion, due to the dedicated and loyal audience the site was able to generate. Google has now started to monetise the site, presumably to some success.
Another success story in the making is Twitter. It has not yet been acquired, but is reputedly well on the way to having 100-million users within the next two years. If Twitter is then able to serve one ad to each user per month, at a clean 10-cent profit, that’s $10-million in its pocket per month. If this is off by 90%, then it is still $12-million a year.
The above examples are admittedly of some of the biggest players in the game, and you should not feel that you need to aim that high. But the pond is deep and the big fish numerous. In fact, according to PartnerUp:
Smaller acquisitions in the $5-million to $20-million range are happening much more frequently than in the past. This is likely because acquirers are snapping up start-ups before they raise substantial capital, making the acquisitions much less costly and providing the ability to do more deals.
Here is a short list of some recent acquisitions that did not rely on a serious technology breakthrough (and were thus much easier and cheaper to set up):
Jason Calcanis, who himself is an online success story due to his involvement in Netscape, had this to say when analysing Twitter’s potential business models:
“Once you have critical mass, you can’t help but make a fortune. An absolute idiot with 10-million to 20-million users can make a ton of money.”
He’s probably right, but the truth is that it costs a lot of money to build a site with a significant audience. And there are no guarantees. It’s not easy. It can’t be. If it were easy, it would not be worth a lot of money to get it right.
But it can be done, and Calcanis hints how to do it when he says:
“If … you don’t have unlimited access to capital, do not take this advice and focus on building revenue streams.”
The good news is that it is surprisingly easy to set up a website, even one that has cool features and interactivity. It is fun, exciting and challenging. The difficulty, though, is in being able to sustain it through its growing — and teething — stages. This could take anything from one to three years. And the chances are that you are going to be doing this part-time, while you continue to make a living elsewhere.
It is important, therefore, that you have a realistic plan on how you are going to sustain your project. The best option would be to attract venture capital, but that (in an ironic twist) is difficult to do if you do not generate revenue. Your next-best plan is to rely on cheap (or ideally free) marketing to spread the word, and a simple monetisation plan that would cover the bills.
This is where, and how, online advertising will help you get to your fortune. It will sustain your growth until you are big enough or have shown enough potential to be considered an asset to a bigger player.
Here is your new to-do list, then:
1. Find a niche audience.
2. Create a platform for this audience. 3. Monetise it to sustain it.
4. Continue to build an audience.
5. Move on.
Never forget the three ingredients of your online project:
niche market,
the right platform, and
monetisation possibilities.
Keep them in mind as you develop your idea, because they are extremely reliant on each other and you need all three to be strong if you want any hope of success.
As you start deciding what niche you want to work with, start investigating the different option of platforms available and cross-check both options against the monetisation possibilities.
My next three posts in the series are going to address each of these topics individually.
11 Responses to “Online millions: The advertising model”
It was actually 1.6% and not 5% - if you read the article that you linked to regarding the purchase Microsoft made. This placed the value of Facebook at $15billion.
“1. Find a niche audience.
2. Create a platform for this audience.
3. Monetise it to sustain it.
4. Continue to build an audience.
5. Move on.”
I disagree with you on this. If you seek to monetise your platform before you have critical mass, then you may never reach critical mass. If you have to generate revenue before you get to critical mass, then you were inadequately capitalised to begin with. The network effects that grow your audience size are inhibited by the network effects of a cost associated with platform usage (like a subscription model, not what you are talking about), but even with an advertising model (which would appear to provide free platform use), there is often a usability trade-off or a nuisance factor cost for your users associated with your revenue plans for them.
By picking a revenue model before you get to critical mass, you have no feedback mechanism as to how acceptable your monetisation plan is to your potential users or audience. If you already have scale, you can take direction from your users as to how to monetise the platform in a way that limits the usability and nuisance trade-off for your most valuable users.
If your objective is to build a user base without a revenue model (i.e. hope it builds fast and that you spend less doing this than you have to spend, and that someone else buys you before your cash runs out because they can monetize your user-base) then so be it. However, I think the risks are very very high and the costs involved (just scaling a system to say, 1M users is an enormous task, let alone the rest of the operations required) would mean that you are likely to burn through a whack of cash (I mean, many $ Million) before your payday comes…or most likely doesn’t.
For me, its far better to start with defined but flexible revenue models. One of these, of course, can be free (i.e. the product that you offer free users of the system). Most online businesses can probably quickly rustle up 4-5 sources of likely income (e.g. ads, affiliate sales, premium products, e-commerce revenues, share of network traffic, uh…uhmmm)…Anyway, if you put them in carefully, early, and pay good attention to design and UI, then the chances are you wont piss off your customers (i.e. you wont slow down your growth rate). More importantly though, you start to build real data early, so that you will start to get some indication as to what might fly and what might not. By the time you get to chatting to VC’s, you’ll be able to back-up your spreadsheets. You can try stuff early, and as I tell my team, its cheaper to learn when you’ve got 5000 users than 5 Million! So I would argue that you need to pick and test several revenue models almost from day 1. A paying customer is worth a lot more than a free customer: In our business a paying customer is worth roughly 500 free ‘customers’.
I can’t think of any VC that would fund a business (and something getting to critical mass without a revenue model almost certainly has external funding) that does not clearly know what its likely sources of revenue will be.
One last point as an illustration: what is ‘critical mass’? If you are a niche player with a specific topic and specific geographic focus, critical mass may well be about 10K unique visitors per day/week/month (depending on how much you want to earn from them) but the point is that if you want to earn, say $2000 pm then your critical mass is probably about 20 to 100 Thousand users (based on pure ads revenue alone, with the variability depending on how focussed you are (focus = higher ad CPM, but smaller audience). A big, unfocused site will need many users before it can pay its bills. Unless I had a lot of very lenient money behind me, I’d worry about revenue from early days and make sure I had enough ammo coming in to sustain what I wanted to do…
@Llew and @Gareth I am going to side with Gareth on this one. I think he has argued the case very well. It is just not possible to launch a successful website, that reaches critical mass, without using up a lot of capital.
This blog series is aimed at an average TL reader, who might have access to couple of hundred thousand rand to start an online project, and who might think it is enough to go big. It probably isn’t, and it would be a pity for the money to go to waste. Ironically, it might go to waste not becasue the project was not successful, but because it WAS, and the infrastructure and platform become too expensive to maintain without a revenue stream.
Also, I am still internally debating (and researching) the virtue of offering something without any monetary commitment, and then switching tracks midway. I think it is far better to offer a service and say to the audience: here is a service that I am offering. It is free if you like, but if you want access to more features, you must pay.
Llew, you say “If you seek to monetise your platform before you have critical mass, then you may never reach critical mass”.
I suspect that if you DON’T seek to monetise it, the same consequence might apply.
You make compelling arguments, but you are trading in a case study of your business, while I am trading in generalities.
“I think the risks are very very high and the costs involved (just scaling a system to say, 1M users is an enormous task, let alone the rest of the operations required) would mean that you are likely to burn through a whack of cash (I mean, many $ Million) before your payday comes…or most likely doesn’t.”
Yes, the risks are high and so too are the costs. In order to be in with a fighting chance, you will ‘burn through a whack of cash’, but that’s the ante if you want a shot at the big pay day while the segment that you’re in is hot.
You could take the conservative route and try to plug in a definite revenue plan from the word go, and bootstrap the venture, but that’s a low potential proposition (albeit a relatively lower cost proposition). It’s exceedingly difficult to bootstrap to a critical mass. Try this - create a niche blog on a free platform. Recruit a couple of friends to do guest posts for free or a share of future revenue. Call me when you get to 1000 unique page views per day. It’s unlikely to happen this year.
“Most online businesses can probably quickly rustle up 4-5 sources of likely income (e.g. ads, affiliate sales, premium products, e-commerce revenues, share of network traffic, uh…uhmmm)…Anyway, if you put them in carefully, early, and pay good attention to design and UI, then the chances are you wont piss off your customers (i.e. you wont slow down your growth rate)”
I am not advocating that you shouldn’t be considering likely sources of revenue, just that you shouldn’t be assuming what will be an acceptable monetisation scheme for your users, without actually involving them in the decision. You can’t ask them their opinion if they don’t yet exist. if you’re Facebook on the other hand, you can still not involve your users in your decision to implement the Beacon program and then have to backtrack and lose the trust of your users. On another note, I have no general objection to early monetisation schemes have no direct impact on the UI or the user experience (eg. sign up with our partner x webhosting company and we’ll give u an extra y per month)
“I can’t think of any VC that would fund a business (and something getting to critical mass without a revenue model almost certainly has external funding) that does not clearly know what its likely sources of revenue will be.”
I know of many, none of which are in South Africa. I’m not suggesting that you should have absolutely no monetisation plan. If your VC wants you to show data at low user or audience numbers as to how you intend on monetising your platform, then they don’t understand statistics or the web space - you’re at the wrong kind of VC.
@ Eve
“Ironically, it might go to waste not because the project was not successful, but because it WAS, and the infrastructure and platform become too expensive to maintain without a revenue stream.”
Faulty logic. The problem you describe is not a lack of a monetisation plan, it’s a lack of seed capital.
“This blog series is aimed at an average TL reader, who might have access to couple of hundred thousand rand to start an online project, and who might think it is enough to go big. It probably isn’t, and it would be a pity for the money to go to waste.”
It might be enough, but only as seed capital. The purpose of seed capital is to show proof of concept: there are people out there that find value in what you are offering. Seed capital shouldn’t seek to prove economic sustainability. Like I said, this is high risk stuff. Don’t ever put money that you can’t afford to lose into a web venture.
“I think it is far better to offer a service and say to the audience: here is a service that I am offering. It is free if you like, but if you want access to more features, you must pay.”
I am also a fan of freemium services, but one has to be careful of what you put behind the wall, so that the user experience of your free service is compelling and competitive, even without the premium services. Some web businesses make the mistake of putting the compelling part of the value proposition behind the wall and that has the effect of severely limiting growth.
I just thought I’d try to expand on this idea of mine regarding the correct timing of a monetisation plan.
I’m not suggesting implementing a monetisation plan “at the end”, whatever that may be. What I’m suggesting is getting to a critical number of users along a trajectory that suggests scale to a critical mass, listening to them as to how best to monetise what is actually “their” platform and testing monetisation plans. You must have a critical number of users first though.
We are actually in full agreement, all things being perfect.
If there was available seed capital in SAfrica, then by all means I would say that a monetisation plan would not be an initial priority, and the “critical mass” could be achieved with outside funding.
But that is the whole point of my six part, skim-the-top, whet-the-appetite, blog post. There IS NO seed funding, or it is very, very limited. What to do then?
I had a 30 minute conversation with a VC yesterday: she has a mandate to invest up to R35 million in a SAfrican online venture, that must meet some criteria. We were both lamenting the lack of projects that could even be considered. Why do we not have 10, 20 or 30 exciting start ups?
Because there is no seed funding to drive the movement.
What I am trying to do is suggest that maybe a)we do not need to try and develop a new Google but can settle for something smaller and b)there are alternative (to some, unconventional) means of funding the start up that does not require seed capital.
There is great talent here. There is strong passion. There is very little financial support, and we must therefore create our own.
So yes, I do agree with you. In a perfect case study, the developers should concentrate on developing a good product, aimed at the right audience, and should feed it from outside financial sources. Those sources (angel investors, VCs) should be excited by the potential returns, and the entrepreneurial online economy thrives.
But that is a perfect world, and we are not living in one
I don’t want to belabor the point or take over your post so I’ll be quick.
I am not describing a perfect world. South African’s live in a dream world where they think that everywhere else in the world, VC’s are practically falling over themselves to give web entrepreneurs seed capital to get their latest & greatest ideas off the ground.
If you’re an aspiring web entrepreneur and you think you have such a great idea, then put your own money and time into it first. If you have to, work on it every day after your regular job and over weekends, or even sell your car, or your house, get a personal loan or max your credit cards out. Once that money’s about to run dry, get your next round of funding from friends & family. Not very glamorous, but being an entrepreneur in the startup phase never was.
If you’re not prepared to “put your nuts on the line” first, then you probably don’t deserve to get Series A VC funding and you’ll battle to find a VC that will take you seriously anyway (whether they are in SA or elsewhere).
Finally, aspiring South African web entrepreneurs tend to think small. 9/10 times their great ideas are built for a South African user, ostensibly because it’s more comfortable when it looks as if there’s no competition. Unfortunately, there aren’t enough people in that target audience for those ventures to reach critical mass either and their competitors are global.
Think bigger! Think globally competitive bitable products & services, or else don’t even bother.
Has anyone out there heard about WideCircles.com. It seems like a way better service then wasting money on PPC. Apparently they are using refering websites ( forums, blogs, wiki, etc. ) and have a viral word of mouth distributed approach to it. My friend told me he got around 100 visits from single post which cost him $0.40c. I am going to give them a try today . In case you are intrested here is it. http://widecircles.com?s=imt1
Good Evening
Just found this artical and replies now, agree 100% with the SA entrepreneur thinking locally, I made my first 10 sales in SA and then 15 at Heathrow in the UK, no VC all funding through my own assets, company now in 8th year as a pty ltd.
Taking my first foray into the online social and business networking portal business with www.warehouse-it.co.za , free web home pages and data base storage is okay, but the big picture is business’s buying a home page to advertise from as a gateway to their more complex web sites!
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Eve Dmochowska spends her day playing on and with the Internet, and thinks it is a rather fun way to make money.
She is the founder of Crowdfund, a crowd sourced fund to help local online startups get off the ground, and of the Geekspace, Joburgs first hot desking space for geeks.
She is also the co-founder of The Broadband Bible which helps SAfricans find the perfect ADSL plan and the Airtime Bible, which compares the costs of cellphone contracts.
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It was actually 1.6% and not 5% - if you read the article that you linked to regarding the purchase Microsoft made. This placed the value of Facebook at $15billion.
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