How much traffic does a web startup need to make money from ads?

Most consumer web apps use advertising as a major or sole source of revenue. On mobile, advertising is less dominant, but it is on the rise.

There are actually several fundamentally different ways of making money with online advertising.

What follows is not an exhaustive list, nor does it cover all the online business history that’s led to today’s model. It just covers what you’re likely to encounter in today’s business. Online advertising has changed so much in the years since the first banner ads were made and sold.

There’s a widely circulated slide by Luma Partners which maps the online ad market, showing just how intricate and elaborate this trade has become.

Even this map leaves things out. Online advertising is a very big business, a very complicated business.

Ads That Are Bought, and Ads That Are Sold

Sold ads versus bought ads

I’ll break advertising down into two kinds: ads that are bought, and ads that are sold. If your ad is sold, you have a salesforce making deals with advertisers, you need to establish relationships, and you can earn a high price per impression. If your ad is bought, it’s found through automated means, it’s moved with software and data, you don’t need to know the advertiser, and it can be priced very low. More and more, the money is shifting to ads bought and sold by software.

The answer to commoditization of the ad impression is the native ad: promoted tweets on Twitter, radar and spotlight on Tumblr. These are ad units with the same form and format as the user-generated content they’re shown with. If I were to make a wild guess, I’d say that as automated buying of impressions drives price per impression ever lower, more and more services will turn to native ads, instead.

Whichever kind of ad you run, you need either scale - to speak in hundreds of millions of monthly pageviews or more - or a niche - a targeted audience that commands a premium price. Even a niche demands a lot of traffic.

Pricing Ads

Here are the most common ways of pricing ads:

• CPM, or cost per thousand impressions.
• CPE, cost per engagement: you’re paid for each user who interacts with the ad.
• CPA, cost per acquisition: you’re paid for a desirable action.
• CPC, cost per click: you’re paid when someone clicks the ad.
• Sponsorship: you’re paid a set price for a set program.

If you break it down, everything except maybe sponsorship boils down to a CPM. For example, suppose you get a dollar per click, and on average you get one click per hundred page views. Then each page view is worth a penny to you, and that’s a $10 CPM.

Ads Only Work for a Very Large Scale Audience

How much traffic it takes

The online ad market can be thought of as a network of pipes, and new online ad inventory never stops pouring into that system. Ten years earlier, $10 per thousand impressions, a $10 CPM, was attainable; now, a $1 CPM would be a pleasant surprise. A $1 CPM means that ten million page views are required to bring in $10,000. That is barely enough money for one or two people to work on a project. You really need to be pulling in at least 100 million and ideally over a billion monthly impressions to make advertising an interesting business.

The major exception I know of to this is ads sold to a very specific niche, where advertisers are willing to pay a premium to access a valuable audience. If you can get a $5 to $10 CPM with ads sold in-house, you only need about 100 million impressions a month, which is still a lot of users, but less than a major media property would need.

As your business grows, one choice to make is whether to build a salesforce to sell the ad space or to bring in partners, who take a percentage of the revenue, in exchange for finding clients. Third party sellers are available, the middlemen crowding the famous Luma Partners slide that shows the web ad ecosystem, and they typically take between 20% and 50% of revenue. Not infrequently there are several sales channels set up simultaneously, each taking its cut.

For a native or niche advertising product, as opposed to an exchange-based product sold programmatically, the sales team is your first and most important line of contact with customers. The first and most important hire to sell ads is a VP Sales, or a Chief Revenue Officer. That’s a very pricey hire, but they are crucial to the business’s success. If you’re going to cut corners, do it elsewhere; this is not a hire to skimp on. A pure scale model, by contrast, is fine to get started on your own.

Bottom line: without millions of users per month, think twice before you count on ads. The advertiser’s pool of money is finite. (CPA budgets, in theory, are not.) Rates are constantly under downward price pressure from all the new services coming on line. If you rely on ads, and you’re not a major media player, it can be very difficult to get enough revenue to justify the work.