I was stunned to read the disclosure today from Facebook (or some sources) that FB is on track to make 4 BILLION dollars of revenue this year.
4 BILLION DOLLARS is from ADVERTISING revenues and I’m sure FB credits (which is facebook’s in house currency – compulsory to be used when you engage the facebook platform to publish games like the ones Zynga makes).
Yahoo is 4 BILLION dollars in revenue and thats also an advertising centric company.
This post is simple attempt to explain HOW money is generated from ONLINE advertising with a special ‘Rodinhood’ angle 🙂
Lets assume that you buy a bottle of Coke from the local paanwalla in in India:
And you pay Rs 10/- for it.
Lets break down the Rs 10/-:
If Coke earns Rs 10 per bottle:
– They spend Rs 3 in manufacturing it ( 30% cost of goods)
– They spend Rs 3 in distribution costs (30% including commision to paanwalla and distributor)
– The spend Rs 2 in advertising costs ( 20% costs in A&M – advertising and marketing)
– They earn Rs 2 (20 % margin)
Now, these % numbers may be different for Coke India/Coke worldwide – but bear with me for this article…
Pay attention to the Rs 2 spent in advertising.
In advertising, the creative and media ‘agency’ who spend that money for Coke across media would take 10% (blended cost of making creatives, media commissions etc) of the spend.
We are left with Rs. 1.80
Now, assume that 90% goes to traditional media, 10% comes to Internet ( for the records, Coke India does not spend 10% on Internet at all – they spend much lesser. But lets assume this % of ad spends on Internet is based on US standards etc)
So, Rs 1.62 goes to TV, Radio, hoardings and ONLY 18 PAISE is available for ONLINE spends.
Now, this 18 paise is typically purchased via google/ad networks/ or sourced by direct sales teams of internet websites.
Google/Ad network margins are 50%. Same with running an expensive sales team.
SO, NET NET, a website that runs a Coke ad gets 9 paise (lets round off to 10 paise) for ADVERTISING COKE on its website.
Now, roll up the numbers.
Coke sold for Rs 10/-
Website received 10 paise!!!!
In short, the site receives 1% or less of the sales price of the product it sold.
This is the Rodinhood ‘DRIP’ THEORY OF ONLINE ADVERTISING REVENUE that I wanted to highlight.
In this case, ONLINE ADVERTISING is a 1% BUSINESS on the Selling price of the goods.
And you can’t change that. Maybe over the years it will become 2% or even 3% as more spends go to Internet/ you advertise cars/finance products etc (but who require a much refined audience).
What WEBSITES CAN change is the NUMBER OF DROPS that they can serve!!
So, if I serve 1000 people this Coke ad ( CPM = 1000 impressions), I can charge 9*1000 = 9000 paise or Rs 90/- per CPM!!!
So, for every 1000 people served (assuming 1 impression per unique), I earn Rs 90.
For every 10k impressions = Rs 900
For 1 lac impressions = Rs 9000
For 10 lacs impressions = Rs 90k
Rs 100 lacs ( 1 crore) impressions = 9 lacs
For 10 crore impressions = 90 lacs
CPM’s could go to as high as Rs 300 and to as low as Rs 15 – depending on Ad networks or Direct Sales used in selling and most importantly basis the SALES PRICE OF THE PRODUCT being sold. But getting better CPM’s is always a fight and that’s not the moot point here.
The BIG LESSON IS – YOU HAVE TO GET CRORES OF PEOPLE to your site each month to REALLY Start making money from online ads.
So when you think – ‘I will start a site and start making ad money’ – you are hallucinating.
TO MAKE BIG MONEY from online advertising, YOUR SITE NEEDS TO OWN the POPULATION of a COUNTRY.
Final maths – 750 million visitors a month on facebook = 8.5 billion users per year. Typical visitors come at least 4 times a year (average of hyper users per day and dead users never coming back) . So 35 billion visits.
Revenue = 4 billion. Hence revenue per visitor per year = 12 cent. Now divide that by 12 months = 1 cent per user per month!!
I cent per user per month = 5 paise.
Hmmm – we did better with 9 paise (cents) !!
Long long story made short:
Wanna earn money via online ads? Then don’t forget to BUILD AN ONLINE COUNTRY FIRST.
******
Hardik Khanna
Considering CPM is a factor of nos of pageviews , so can do with a less number of users 🙂
Also relevance of the website matters – say targetting a very focus audience can justify charging advetiser much higher for CPM.
In case of social network where there is little/no focus – in terms of content of the website- the CPM is relatively lesser.
E.g. an education website – with:
1 lac visitors / month – visiting 4 times a month = 4 lac visits
4 pageviews/user – each visit
Total pageviews =16 lacs
@ Rs.200/CPM
Earn:3,20,000 per month
Alok Rodinhood Kejriwal
who will sell 1.6 million page views for you at Rs 200 NET CPM??
An AD network in India ? NEVER
If you hire a sales person, s’he will cost 1 lac a month (salary + overheads) – BUT WILL have no job to do for 25 days in a year.
Selling 1.6 million PV’s takes 1-2 Release Orders. That’s 2 days of work. Then?
Then… they quit out of fear that their Job is not progressive
This is EXACTLY my point.
Hardik Khanna
I certainly didn’t meant through ad network….
Yes…sales is no doubt an expensive resource to manage.
Alok Rodinhood Kejriwal
@rodinhood nice, clean description. But arn’t you assuming 1 bottle sale per impression (you say 9 paise per bottle sale -> per ad)@SarangLakare do i say that? can u cut paste that para please? I mean 9 paise per exposure of the brand@rodinhood you say per bottle 9 paisa goes to online ads.. and hence, you say you’ll charge coke 9 paisa per impression.@SarangLakare yes. Pay 9 paise per bottle. Now work the numbers for coke: 1000 impressions * 2% convert = 20 bottles sold = Rs 200@rodinhood That 2% convert is not mentioned. Also, by this logic, for Rs 200 rev (from 1000 imp), you expect coke to pay Rs 90 (CPM)?@SarangLakare yes. in this maths coke spends 45% on ads to get sales. (40% is standard a&m in fmcg). for coke its higher coz its recallMentioned in this Tweet
Alok Rodinhood Kejriwal
@rodinhood if coke can pay 45% towards CPM, then why is it 1% biz for online ads? If all coke buyers were online, won’t that 1% grow big?@SarangLakare great question. actually online trade/travel/jobs do exactly that. coke needs salience and visibility via tv/hoardingsAnuj Khurana
There is another one. People wanting to make an ecommerce site (i know u dont like flipkart but they have inspired many people to want to build an online store)
Let’s say you wanted to earn Rs. 100,000 by selling online.
Assuming a 20% retailer margin.
you need to sell good worth 500,000 a month
Average ticket price (let’s leave out electronics) is Rs. 1000/-
So total goods to be sold is 500
For every 100 visitors you will get one customer (100 visitors = 10 prospects = 1 customer | 10% rule)
So you need 50,000 visitors.
So before you decide to start an online store tell me how you will get 50,000 visitors every month.
I am a believer in online stores (heck I am building an ecommerce platform at Dookan) but for every wannabe online seller who calls me I send back 8 asking them to think about how they will get traffic.
Internet makes it easy for every one to be in business but Internet also sends all the money to the top 3 players.
Anuj
Alok Rodinhood Kejriwal
well, i know that it will COST you Rs 10 per qualified VISITOR = Rs 5 lacs
so, you will lose 4 lacs.
Then you will run to a VC and sell him your soul.
Then he will sell your business and sell his soul to the devil.
Then, you will belong to the devil.
(almost what happened to me in mobile2win).
Kartik R
Hardik, how many institutes are advertising at 200 rs cpm? .. please connect me to ad networks, agencies etc dealing in education if you can 🙂
Kartik R
The point that has not been considered is that – cpm is counted for one ad slot and not the whole page. So multiply the number with ad slots available and the number of advertisers competing for that reach.
Facebook apparently has 4-5 ads on each page, which is also the case with portals. This is an essential stepping stone that allows you to play with the periphery like facebook credits competing as virtual currency (virtual bank) with real world currency, their product – marketplace, premium memberships, discount deals, geo based sales, etc.
The web cycle is ads -> own products -> peripherals
Alok Rodinhood Kejriwal
not really. cpm is inversely proportional to the ads on a page. i am sure you know that
so, Rs 90 CPM per ‘page’ is more like Rs 30 per cpm * 3 ads (if a network)
Or may be 150 per page or even 200 if sales are direct. But reduce cost of sales that is equal to 50% at least.
Anuj Khurana
Ok while all of you ignore the real question and nit pick on the details let me ask you another question. Seen the recent trends in media consumption ….instapaper, readability, safari reader extension, the iPad, evernote clearly for chrome etc are growing like crazy these days making “ads” on websites a slowly disappearing concept…early days i know but if mobile and tablets are the future of internet….ads are definitely not going to help you monetize (so lets’s not waste time arguing about page views and no of ad units on a page. u will be lucky if u can fit one ad unit on the mobile site).
If I can extend what happened to TV (HDR’s like TIVO made ads useless pretty much like what instapaper is doing to web) and radio (paid satellite radio for niche thrives while free ad supported radio is dead/dying) in the US to what will happen on the net….we are looking at a limited life span of ad supported model for most sites….
we are already seeing that with sale of apps as the only real credible and sustainable way to make money on mobile (and tabs)
So while Alok in his inimitable style asks us not to depend on advertising for monetizing websites I am wondering if he will share what he intends to do at games2win to monetize the PC web experience?
Over to you Alok
Anuj Khurana
ha ha i thought it was only a joke. But its for real…there are people who believe that they can make loss on each product they sell and make up for it in volumes…..the only thing you will get with volumes is bigger losses 🙂
Alok Rodinhood Kejriwal
fantastic question!
I was hope someone would ask – and the fact that this is actually going to be the next blog ‘If not ads, then what’.
So you are absolutely right that ads are passe. they are 1.0
The good news for Games sites and games2win?
CONSUMER REVENUE via Game Downloads/In-App purchases and also in-game currency.
Let me take the coke example itself I quoted above:
So, for every 1000 people served (assuming 1 impression per unique), I earn Rs 90.
For every 10k impressions = Rs 900
For 1 lac impressions = Rs 9000
For 10 lacs impressions = Rs 90k
Rs 100 lacs ( 1 crore) impressions = 9 lacs
For 10 crore impressions = 90 lacs
NOW IMAGINE THAT COKE STOPPED ADVERTISING. What happens?
Lets take 10 crore impressions. If I can CONVERT 2% of those (what Angry Birds, Zynga. Sims Online are doing) INTO PAYING USERS THEN
20 LAC consumers agree to pay me 9 cents ( lets not assume 99 cents in India) = Rs 1 crore in DIRECT REVENUE from downloads etc!!
Anuj, the fact that Zynga is a 20 BILLION $$$ Company is essentially this!!
They have CRACKED the ability to shoo away ads and directly collect consumer revenue.
– Because their games are compellling
– Also because of incredible inventions like the iTUnes wallet and Facebook credits.
Check this:
Alok Rodinhood Kejriwal
Ronak,
Netiquette demands that you first explain your view point clearly and THEN send people to links. U don’t expect them to visit links to read replies – else we will all land up flying to different planets and not remember where the journey began!!
Sorry, I will not click on the link.
PS- to state that some links on your blog may/may not work is the worst kind of marketing I have ever heard.
Now i will NEVER go to your blog.
Ps – I am being harsh to make a point.
Abey John
Anuj with the amount of noise online the visitor to conversion ratio is closer to 500:1.
Abey John
Dookan looks interesting…
Anuj Khurana
Thanks Abey 🙂
The job now is to take it from ‘interesting’ to ‘exciting’ 🙂
We are working on it
Abey John
Well flat 6% commission with no extra fees is exciting enough 🙂
Are you guys going to spin it out into a generic payment gateway? Any support for recurring payments like subscriptions?
Anuj Khurana
No plans to make a payment gateway. That problem is best solved by someone like Paypal or banks (will happen eventually)
Recurring payments is a tricky problem and unfortunately does not have a very clean solution. Is there a specific requirement you have in mind. Drop me a line at anuj@ajency.in and we can explore this further.