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.
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