@andrewchen

Get the newsletter · 2018 essays (PDF) · Featured · Recent

How NOT to calculate ad revenue

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

chart2

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 ;-)

PS. Get new updates/analysis on tech and startups

I write a high-quality, weekly newsletter covering what's happening in Silicon Valley, focused on startups, marketing, and mobile.

Views expressed in “content” (including posts, podcasts, videos) linked on this website or posted in social media and other platforms (collectively, “content distribution outlets”) are my own and are not the views of AH Capital Management, L.L.C. (“a16z”) or its respective affiliates. AH Capital Management is an investment adviser registered with the Securities and Exchange Commission. Registration as an investment adviser does not imply any special skill or training. The posts are not directed to any investors or potential investors, and do not constitute an offer to sell -- or a solicitation of an offer to buy -- any securities, and may not be used or relied upon in evaluating the merits of any investment.

The content should not be construed as or relied upon in any manner as investment, legal, tax, or other advice. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Any charts provided here are for informational purposes only, and should not be relied upon when making any investment decision. Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, I have not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. The content speaks only as of the date indicated.

Under no circumstances should any posts or other information provided on this website -- or on associated content distribution outlets -- be construed as an offer soliciting the purchase or sale of any security or interest in any pooled investment vehicle sponsored, discussed, or mentioned by a16z personnel. Nor should it be construed as an offer to provide investment advisory services; an offer to invest in an a16z-managed pooled investment vehicle will be made separately and only by means of the confidential offering documents of the specific pooled investment vehicles -- which should be read in their entirety, and only to those who, among other requirements, meet certain qualifications under federal securities laws. Such investors, defined as accredited investors and qualified purchasers, are generally deemed capable of evaluating the merits and risks of prospective investments and financial matters. There can be no assurances that a16z’s investment objectives will be achieved or investment strategies will be successful. Any investment in a vehicle managed by a16z involves a high degree of risk including the risk that the entire amount invested is lost. Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by a16z is available at https://a16z.com/investments/. Excluded from this list are investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets. Past results of Andreessen Horowitz’s investments, pooled investment vehicles, or investment strategies are not necessarily indicative of future results. Please see https://a16z.com/disclosures for additional important information.