Conventional wisdom says that entrepreneurs who start a Web-based business will do so with VC money. Read enough stories of Internet ventures that enjoy lucrative exits in the millions (in some cases billions) of dollars, and it’s easy to assume that the only path to success is to begin by securing deals with investors who are far less interested in helping a startup build a substantial brand as they are in realizing a return as quickly as possible.
Bootstrapping simply isn’t sexy anymore.
But for many startup publishers, bootstrapping is a way of life, and VC money isn’t an option. According to angel investor David S. Rose, the success rate of entrepreneurs who chase down VC or angel funding is about 1 in 500. Of the rest, some will give up, leaving a persistent majority to build their businesses from behind the financial eight ball.
For online publishers, this can be a particularly daunting task. Let’s forget any money needed for technology build-outs (off-the-shelf CMS products can keep these costs to a minimum) and content development. The generation of revenue alone can create too high a hurdle to overcome. A VC-backed online publisher can take the time to build a large organic audience; a bootstrapping one doesn’t have that same luxury.
The basics of how the online ad industry is structured and how marketers think about it has a lot to do with this. Even with digital spending growing, online advertising is viewed by many marketing directors as a second cousin to TV, which, as reported in Adweek in December 2012, still accounts for about a third of all media spending. With millions of sites available to advertise on, and so few marketers making online advertising a priority, it makes sense that marketing directors create strict variables with which to judge the sites they decide to promote their brands on—after all, they can’t possibly entertain every site that is vying for their ad dollars.
Too often, these variables consist strictly of large numbers—if a site doesn’t have, say, 3 million unique viewers per month, they’re not getting in the door of any major brand or agency. For the rest of the sites that don’t reach this benchmark, brands rely on ad exchanges to place ads across the Web on the cheap. Demographics and audience loyalty often take a backseat to audience size and click-through rates.
For smaller publishers, working with ad exchanges is often the only way to generate any type of revenue. But the exchanges typically provide ads at the low-end of the payment scale: approximately $3 to $6 CPM for pre-roll ads; five cents to 50 cents for display ads. Keeping in mind that maintaining a quality user experience mandates that ads remain somewhat limited, these numbers don’t add up to much.
Without significant traffic rates, at the higher end of the scale, an online publisher would only earn $5 for every thousand pre-rolls shown. Some visitors will see more than one, some won’t see any (ads may not always be available, or viewers might leave a page with video on it before an ad ever starts). Whatever way you slice it, it doesn’t add up to very much.
Now factor in the cost of getting the traffic to the publication to begin with. The term “buying traffic” has come to have a very negative connotation, and in the past year alone seems to have broadened to include any type of pay-per-click advertising, including placing ads through Google, Bing, Facebook and other “tier 1” providers. But great content alone won’t drive traffic—videos are notoriously difficult to get properly listed in search results, and like any other product, a certain degree of marketing will likely be necessary (media often cross-pollinates: one TV show will advertise itself during another TV show on a completely different network, for example).
Placing pay-per-click ads on Google, however, is likely to run a minimum of 10 cents per click, or $100 per thousand. Think about that: the cost of driving traffic through Google would be $100 per thousand visitors, while the revenue from pre-roll ads through an exchange will hover around $5 per thousand, resulting in a $95 loss. Even if we cut Google costs in half, publishers would be looking at a $45 loss for every thousand visitors. That's clearly not a workable model.
To remedy the situation, many publishers turn to the remnant market, where clicks can be as low as half a penny. Financially, this can finally start to make sense, but at what cost? Remnant traffic, being nearly impossible to quantify demographically, won’t help generate direct sales with brands, but, as has been reported by Adweek, may also include a certain percentage of nonhuman traffic (the potential for nonhuman traffic may be pre-baked into the low cost of the ad that brands are paying through the exchanges).
Clearly, there has to be a better way.
Of course, publishers need to become savvy marketers themselves, and understand how to use social networks better and run campaigns more effectively. And even bootstrapping entrepreneurs should be prepared for their publications to run at a loss for a period of time before generating a profit. But changing the industry will take more that just an adjustment by publishers—it will require marketers to change their view of “value” as well.
The current, pervasive and historic means of determining where value lies on the Web is no longer relevant. Enough is known about robotic traffic that the sheer size of an audience can no longer be a determining factor, and click-through rates have always been a poor indicator of success. According to Digiday, only 8 percent of Internet users account for a whopping 85 percent of all clicks, and half of those are by accident. So where’s the value there? If marketing directors only want some large numbers to validate spending the balance of a budget when the rest of their media buy is complete, then life can just proceed as normal … bring on the robots!
But the missed opportunity here is that oft-overlooked Web publishers can provide real value—branding to an engaged audience; opportunities for sharing and direct engagement; instances to get consumers involved with content, rather than in the way of it. But to do that, marketers need to help fuel the trend toward smaller, controlled online communities of transparent highly targeted and demographically desirable audiences, and away from outdated and unproven measurements of so-called online advertising success.