How NOT to calculate ad revenue

I recently read an interesting article that included a Bear Stearns projection on in-video advertising:

To quote the old guy in the Conan the Barbarian movie – WRONG!

In order to model out your CPMs, you should never ever do a straight calculation of:

Wrong revenue = CPM * impressions / 1000

The reason is that brand advertising is typically demand constrained – meaning that you need to field a big NYC-based sales team in order to do your sell, and as a result, you can only sell some percentage of your inventory. You can think of this process more like an enterprise sell, which scales revenue up with the number of sales folks you have.

Another corollary to this fact is that if you have a good CPM to start out with on one of these ad networks, don’t assume that the high CPM will continue as you scale up revenues. It’s easy to "tap out" ad networks, which gets you high CPM brand campaigns and turns into really crappy direct response campaigns.

Modeling brand ad sales as an enterprise sell
The right way to model out inventory is a number of equations – I’ll pretend that a site has two types of inventory, their "brand" stuff and their "direct response" (aka remnant) inventory:

Brand revenue = # campaigns sold * average campaign size * brand CPM
Direct response revenue = (total impressions – brand impressions) * remnant CPM
Total revenue = Brand + remnant revenue

In an actual forecast, you could get a ton more detail in the brand revenues side, since what you really care about is the # of ad sales people you have, how many campaigns they’re selling per quarter, the size, etc. Again, think of this as an enterprise sell, and treat it as such.

Similarly, if you were doing this for an entire site, you’d want more granularity. You’d approach this channel by channel, and do the CPMs and %s for each one. Inventory has different characteristics depending on ad placement, where you are in the usage of the site, and other factors. If you incorporate this into a grid, you can start to get a sense for how your different channels differ. That way, you can make the most accurate prediction possible.

Perhaps I’ll do a longer post on that at some point, with Excel spreadsheet attached ;-)

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Chris Wexler

At what point is remnant inventory counter productive — particularly in the video space? Selling inventory for pennies on the dollar brings in revenue, to be sure, but theoretically it also brings in tier 2 and 3 advertisers which can severely degrade the user experience on the site. Is 5% of your revenues worth making 50% of your site less desirable to your core users?

Wouldn’t just be better to forgo that revenue in order to enhance the experience and encourage repeat visits or even use that space for house ads promoting new areas of the site as you build your premium advertiser base?

All revenue is not worth it.
http://profile.typekey.com/christianbusch/ Christian

Andrew, good analysis as usual. Goes to show why 22-year old banking analysts for the most part can’t predict internet advertising dollar streams.
Re. Chris Wexler’s comment – you can achieve your goal of not diluting experience by cordoning off certain pages/inventories to brands only – i.e. you’re creating a “Business Class” for advertisers. That way you can dip into both streams.
http://vielmetti.typepad.com Edward Vielmetti

ah, so the overwhelming assumption here is that you have too many page views and not enough good advertising to fill them, so you have to slot in crappy advertising to fill the holes, and maybe you’d be better off running PSAs or white space or attractive blocks of color or in-house t-shirt ads instead of the crappy ads just to make sure the crappy ones don’t crowd out the good ones you really want to sell.

what’s a friend worth if they don’t click on your ad?
http://www.dogster.com Ted Rheingold

Hi Andrew,

Great entry. Realism is very much good advice right about now.

I can still recall our early heady days when we forecast revenue based upon our (over-calculated) pageviews and our expect (also over-calculated) network CPM. You can imagine our frustration when the network CPM was half what we hoped and they could only server us a fraction of the impressions we requested. Note to anyone: only sites with massive page serves can run a business on direct response ads.

You are also spot-on in regards to brand advertising. I’m speaking for younger start-up (not the Youtubes or Facebooks) but no matter what the plan says, you don’t need a sales teams until a core team member is maxed out selling ads. Another big mistake I see a lot on the West Coast is not doing any sales st all. If your rev model is brand advertising and you are publishing, it’s really important that at least one person is selling. This person should really be able to cover their salary – or you really are in trouble – yet even if they aren’t closing they will be making dozens of relationships at all the agencies and companies you’ll be working with for years to come.

Far too many companies think that advertising is like a spigot you can turn on when you are ready. Hardly. Brand advertising is a relationship business and you want to get over the cold-start as early as possible.

Hiring an ad team with the ability for all of them to be closing right away is putting the cart first and burning through your cash. For young companies, if whoever is doing sales first is doing well, then hire a second. If they are both doing well hire a third or build the team. The nice thing about sales people is if they aren’t selling they don’t want to be there either so after three months if they aren’t closing deals you can just let them go, they’ll be happy to find greener pastures.
http://blog.webpalnetworks.com/ Jason

A fresh view of ad rev calculations!
http://seattlestartup.wordpress.com/ Leo Chen

Typical sell side analyst projections with no granularity. Maybe the Bear analyst was in a rush to cash in his $2/share or maybe he was wondering what to do with his stock options now that the exercise price is higher than the share price. =)
Nice post…
dan

more likely the stream served (which should be in millions) are ads served. that would make more sense.
person

I would love to see an excel if you have one … :)
http://www.weplay.com Trevor

Am I missing something or did this guy also forget to divide by 1000?
1 million streams in 2008 at $20 CPM would be $20K not $20M.

Maybe that’s why their stock price got divided by 1000?
Imran

plsease can you show an excel spreadsheet on how not to calculate ad revenue
http://www.networkmarketingsuccess.ws mlgreen8753

That's an interesting breakdown on video advertising metrics. Small businesses find this method useful in measuring the effectiveness of their ad campaigns.
http://www.networkmarketingsuccess.ws mlgreen8753

That's an interesting breakdown on video advertising metrics. Small businesses find this method useful in measuring the effectiveness of their ad campaigns.
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