Internet Advertising Revenue

Q. Where I can get the advertisement revenue data for generating a website revenue model?

A. I don't know much about the subject, but I can offer a few basic remarks.

Note: Remarks related to revenue are preliminary. Some of my assertions may be incorrect. Don't rely on dollar figures mentioned here (most importantly, CPM and CPC rates).

Thanks go to Steven T. for some criticism and corrections.

1. For the purposes of this discussion, a page is a single webpage and a site is a set of one or more pages. A page impression is defined as a page load.

Again for our purposes, traffic is defined as the number of page impressions that occur at a given site during a given time period. Note that the word can mean other things in other contexts; for example, unique visits.

An ad impression is defined as the loading of a single advertisement (which may be an Internet, dead-tree, or television advertisement).

2. As I understand it, advertising revenue for existing sites is sometimes public for publicly-held companies and generally private for other companies.

I'm not aware of any analysis sites that aggregate the public information and provide it for free, though sites of this type may exist. That said, I'll list some related numbers later in this document (see the section that discusses effective CPM rates).

Note: There are analysis sites similar to Alexa and Quantcast which display total-value guesses for arbitrary domains based on traffic numbers, but I don't believe that these guesses are useful.

3. People who need to estimate potential advertising revenue sometimes use at least three approaches: (a) Start with estimated traffic numbers and make calculations based on the payment models used. For example, the following notes discuss Cost Per 1,000 Ad Impressions (CPM) and Cost Per Click (CPC). (b) Survey public companies with matching business models. (c) Hire a marketing research firm.

4. Advertising rates depend on multiple factors. Here are some possible examples: (a) Number, size, and placement of ads on a page. Rates may be lower for pages that include more ads, smaller ads, or poorly placed ads. (b) Traffic (obviously, high-traffic pages are worth more). (c) Payment model (ad impressions may be worth less than ad clicks). (d) Visitor engagement (pages that visitors spend a lot of time on may be worth more).

5. For the sake of discussion, we'll assume that the same CPM rate applies to all of the ads on a given site. If this is the case, the following formula can be used:

Monthly ad impressions for the site, divided by 1,000, times the CPM rate charged for each ad, equals monthly CPM revenue for the site.

6. According to one source, the effective CPM rate for Facebook and MySpace is about one dollar. Facebook is lower and MySpace is higher. Note: I say “effective” CPM rate because I don't know if this figure is based on actual CPM rates or if it's a conversion of some type.

For comparison purposes, the effective CPM rate for the major portals is supposedly about $10, the effective CPM rate for print magazines is about $20 to $40, and the effective CPM rate for video ads is about $10 to $50. Note: These figures are unverified and subject to change. In fact, they may have moved well outside these ranges since this was written.

I've seen claims that ordinary sites (below the nationally known level) routinely match or exceed the Facebook-MySpace effective CPM rate of one dollar. In fact, it's probably true that some ordinary sites achieve CPM rates of $2 to $4 or more. However, I believe that these numbers may be overly optimistic for most sites, especially new sites.

Let's talk about a hypothetical new site. We'll make a CPM revenue estimate based on conservative numbers. The site has 1,000 visitors per month initially. Visitors to the site typically load two pages (the main page and one subpage). Each page has one banner ad. The CPM rate is $0.50 (50 cents per 1,000 ad impressions).

To get page impressions, take 1,000 visitors per month and multiply by the number of page impressions per visitor (two). The result is 2,000 page impressions. To get ad impressions, take 2,000 page impressions and multiply by the number of ads per page (one). The result is 2,000 ad impressions. To get monthly CPM revenue, multiply 2,000 ad impressions times (50 cents divided by 1,000 ad impressions). The result is one dollar.

7. For the CPC payment model, you'll need to come up with an estimate of a parameter known as the click-through rate (CTR). This is the percentage of ad impressions that will result in ad clicks. For example, if you expect 3 out of every 2,000 people who see a given ad to click on it, CTR for the ad is 0.15 (3 divided by 2,000, times 100 to convert to a percentage).

In real-world situations, CTR will vary wildly based on a number of factors. But it may be possible to determine mean CTR (as opposed to median CTR) for some sites. At Facebook, for example, the number was apparently 0.063 in 2009 and 0.051 in 2010.

As a rule of thumb, assume that CTR generally ranges from 0.05 to 2.00 (not absolute limits) and that 0.10 is typical. Higher numbers mean that ads are more effective. If ads are targeted, 1.00 or above is possible, but not guaranteed. Otherwise, CTR will often fall near the typical number (0.10) or below.

For the sake of discussion, we'll assume that CTR and the CPC rate are consistent for every ad on a given site. If this is the case, the following formula can be used:

Monthly ad impressions for the site, multiplied by CTR, divided by 100, times CPC rate (dollars per click), equals CPC monthly revenue.

CPC rates are highly variable. They can range from pennies to dollars. For the sake of discussion, let's take the hypothetical site discussed in the previous section and assume a CPC rate of $0.20 (20 cents) and a CTR of 0.50.

There are 2,000 ad impressions per month, as noted previously. Take 2,000 ad impressions and multiply by (CTR divided by 100) to get clicks. The result is 10 clicks. Multiply 10 clicks by the CPC rate to get monthly CPC advertising revenue. The result is two dollars.

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