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Super Rewards and the leadgen side of Facebook virtual currency – can it last?

The $12MM/year Facebook app
There has recently been a lot of news about a single Facebook app generating $12MM in revenue per year, called Mob Wars. Here are some articles from Eric Eldon of VentureBeat, here and here.

Here’s some predicted numbers for some of the other apps as well:

Virtual currency tips inside of Facebook
Justin Smith from Inside Facebook did some more digging on this. They recently had a great interview with the founders of Super Rewards, the company that’s powering much of the virtual currency-based games on Facebook along with Offerpal and others.

There are some great comments related to Facebook-specifc strategies, and also on performance metrics like below:

The core metric we use is dollars per click. We hope our developers can get 25% of their daily active users through a Super Rewards page at some point. Of those, if the economy is balanced correctly, you should see a 40-50% click through rate, and ultimately a net 8-10% conversion rate. Developers get about $1.00-$1.50/conversion for US users, but less for international users. We’re lucky to get $0.06/conversion in China, but we have games operating in Europe and other parts of Asia at $0.25 and up.

So assuming all of a developer’s traffic is US traffic, the developer could see up to $83 per day per thousand DAUs. However, on an average basis across all geographies, we are about half that number. It goes without saying that there is a wide distribution around the average based on quality of app and balance of virtual currency economy.

There are some other comments about how users stop monetizing as well once they are leveled up and aren’t buying as much. All worth reading.

The history of incentivized leads
Note the flow of how money flows into the Facebook ecosystem:

  • People install a social gaming app
  • They play the game, then want more money
  • To get more money, they fill out lead forms for auto insurance, etc.
  • The users get the virtual currency
  • The social game publisher gets their payout from the lead itself

Now if the leads end up being poor quality – like if the Facebook audience is putting in garbage data, or signing up for things they are going to cancel, ultimately that will affect the value of the lead. The reason is that if the Facebook user has a lower LTV, then the acquisition price that is willing to be paid for that user will be less.

A cycle repeated itself online over the last few years where leadgen companie liked Gratis used a lot of incentivized offers, using offers like below. You can read more about Gratis on their Wikipedia entry here or a Wired article here.

Ultimately, these leads weren’t of terribly high quality, tricked the user, and a bunch of other bad things. So that industry has slowly transitioned itself out as a result.

The question is, are incentivized leads from Facebook any different? How will the quality compare to the now low-value leads generated from companies like Gratis? I suppose it will not take long to find out.

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As Facebook saturates in the US, what’s the next step?

Facebook is winning on traffic
Several articles have recently come out that speak to Facebook’s tremendous growth overall, and particularly, overseas:

As TechCrunch points out, among the key factors that have led to the growth relate to the Facebook’s strategy of letting users translate the site, allowing it to roll it out quicker to new countries:

Most of Facebook’s growth is international, where they’ve executed on a brilliant strategy for quickly rolling out localized versions of sites by getting their users to do the translation work for them (MySpace, by contrast, expands via a command-and-control infrastructure that puts people on the ground in each new international market).

This will have a big impact on the global outlook for social networks. The international market has traditionally been much more fragmented, more viral, and as a result more startups have targeted it as a niche to get some traction. But as MySpace and Facebook strengthen their grip in more countries, perhaps even that will be harder

International users suck at monetization
As I’ve discussed many times on this blog, international users are extremely hard to monetize, unless you’re Japan/UK/western Europe.

Mostly the reason for that is 3-fold:

  • For direct response advertisers, payment processing for credit card transactions is a pain – either they don’t have credit cards, or there are potential fraud problems or high transaction costs
  • There are natural inefficiencies like language, culture, and geography which may cause advertisers to convert more poorly and otherwise not be able to deliver their goods and services
  • Brand advertisers mostly care about influencing US spending, or spend their dollars with US-based agencies and multi-nationals, unless your social network has reached scale

An interesting follow-on to the last point is that for some companies – and Hi5 and Friendster come to mind – they may have achieved enough scale that they have an interesting flow of brand advertising dollars from local international brands. When you’re a top 5 site in a country, dollars might follow you, and that’s a good thing. Certainly Facebook has reached this point in countries like Turkey or Canada.

My argument here would be that Facebook knows that international users suck at monetization, and if the primary source of traction is overseas, other than acting defensively, the company will start focusing on the next stage of monetization for the site.

The next steps for Facebook monetization
Given the fact that the team around Facebook hasn’t stumbled much in the past, it’s likely that they will continue trying some Hail Mary products around advertising that, if they work, would generate a huge amount of revenues. Among other ideas, this would include variations on Beacon (both inside and outside of Facebook), trying to monetize their user data via sharing or syndicating newsfeeds, integrating ads into Facebook Connect, etc.

If they decide to get boring and try to monetize in normal ways (and in particular following MySpace’s lead), then it would make sense for them to:

  • Build out contextual sections like Games/Music/TV
  • Add advertiser-friendly ad units like leaderboards rather than tiny proprietary spots
  • Allow for homepage takeovers by brands

OK, let’s just admit that none of these things are likely to happen :-) And if they do, it’d be a big deal because of Facebook’s very user-leaning stance on interfaces, clutter, etc.

And yet these things were there from Day 1 on MySpace.

MySpace’s secret weapon: FOX ad sales
This brings me to my final point – Techcrunch says that Music is MySpace’s secret weapon. I disagree.

It’s a possible reason why users like MySpace, but ultimately I think that the key issue around monetization will be that MySpace has access to the FOX ad sales team where Facebook does not. This leads to a huge increase in brand dollars flowing MySpace’s way that would otherwise be difficult for Facebook to access. Think about it this way – here’s the revenue information for News Corp/FOX:

Revenue for the year ended June 30, 2007 was US$28.655 billion with an operating income of US$4.452 billion. Almost 70% of the company’s sales come from its US businesses.

And of that $28B/yr in revenue, obviously a very large portion of it comes from advertising. Now it’s not like MySpace has access to everyone who’s selling ads across News Corp, but certainly the conglomerate knows its way around the ad inventory. And very importantly, some percentage of the entertainment-related properties across FOX/News Corp will likely bundle MySpace inventory as part of every deal. This makes it so that a big record studio can go and launch a new artist, reach millions of people, and only talk to the folks at FOX to make that happen.

Ultimately, my guess is that the monetization futures of both Facebook and MySpace will diverge strongly as they establish themselves to be very different companies with different goals and strengths. It’s fun to pit two folks in a sorta-related category together, but I think that Facebook and MySpace are after very different goals and that will play itself out soon enough.

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Counting your big pile of Benjamins: 5 startup tips for maximizing ad revenue

(this is a cross-post of the guest blog I wrote over at the Startonomics blog yesterday)

So you want to make some money, eh?

Every startup gets to the point where they decide to bring in some ad revenue, and it's worthwhile to consider exactly how much money will be generated through advertising. So in the parlance of the ad industry, your "ad inventory" is the set of impressions that you have to sell to people. Let's talk about modeling that goes beyond the simple reports into thinking about what drivers influence your CPMs and impression counts.

This blog post will go over some of the key milestones that any ad-supported startup will have to face. In particular, we'll discuss 5 stages:

  • Stage 1: Just getting started
  • Stage 2: Layering in new sections
  • Stage 3: Thinking about growth
  • Stage 4: Adding in multiple ad networks
  • Stage 5: Building up brand sales (rep, vertical, direct, or otherwise)

Let's get started with some basic metrics around CPMs and pageviews…

Stage 1: Just getting started
When you first get started, it makes sense to sign up to a self-serve, automated CPC ad network like Google AdSense. At the end of the month, you'll get a report for how much money you've made and what your CPM is, which will look something like this:

For many folks, just looking at this kind of number is enough, although it doesn't provide much detail beyond the core revenue numbers.

As I mentioned in my previous blog on 5 factors that determine your CPM rates, there are some rules of thumb for what kinds of CPMs you should expect on your site. Here are some very rough numbers:

  • Social sites (forums/chat/etc) without direct ad sales teams: <$0.25 CPM
  • Largely international sites: <$0.50 CPM
  • Medium-sized sites that use banner ad networks: <$1 CPM
  • Reference sites in a specific category: >$5 CPM or sometimes
    much higher, depending on category – we ran into home improvement
    reference sites that did $20 CPMs

Much of that is determined by the frequency of the pageviews, how specific it is, how much international advertising there is, etc.

Stage 2: Layering in new sections
For the sites out there that grow beyond AdSense, you need to have more granularity for thinking about and optimizing your ad inventory. You have to break down your site into the pieces that influence the performance the most. In general, that tends to be factors like:

  • site section (or function), like Homepage, Profile, Media, Inbox, etc
  • ad unit size, like 300×250 or 468×60 (full IAB ad units listed here)
  • type
  • targeting
  • etc.

The point is, you should have a good sense of where your ad units and impressions are coming from, and how revenues overlay that. And the more impressions you get, the more granular you'll want to track your advertising.

Let's take a social networking site like MySpace as the example here. They might break down their inventory, at an early stage, into something like below:

Section Impressions Avg CPM Revenue
homepage 100,000 $1.00 $100.00
forum 500,000 $0.50 $250.00
profile 200,000 $0.50 $100.00
message 100,000 $1.00 $100.00
Total 900,000 $550.00

(disclaimer: note that these numbers are for purely illustrative purposes only – your mileage may vary)

Once you have an inventory breakdown like above, you can start rolling up your aggregate revenues, impressions, and CPMs.

Stage 3: Thinking about growth
The next phase is scaling up your site and thinking about where you're likely to add to your ad inventory. In general, static areas like the homepage aren't necessarily going to grow very much. But other portions, like forums or profile or other social areas are likely to experience network effects that drive non-linear growth.

As a result, you'll end up adding traffic disproportionately to the social areas of the site, and your aggregate CPMs are likely to be brought lower by the higher-traffic, lower-value communication parts of your site. In the cases where the higher pageviews are also brought on by higher engagement, you might also expect the CPMs to decrease as you hit frequency caps imposed by the various ad networks upon your userbase.

Section Impressions Avg CPM Revenue
homepage 200,000 $1.00 $200.00
forum 2,000,000 $0.40 $800.00
profile 1,000,000 $0.40 $400.00
message 500,000 $0.75 $375.00
Total 3,700,000 $1,775.00

(again, disclaimer: note that these numbers are for purely illustrative purposes only – your mileage may vary)

The point is that even though the traffic grew over 4x, the revenue only grew 3x. That's to be expected based on the reasons discussed above, primarily driven by lower-value inventory tending to grow like weeds.

Stage 4: Adding in multiple ad networks
It's also often the case that having many different ad networks can dramatically affect your CPM rates as well. Because of frequency capping issues and the availability of high-value campaigns for each ad network, a lot of times high-CPM opportunties are spread lightly across many sites and you don't get much of a benefit for having deep engagement. One way to solve that is by serving the ads of many different networks and optimizing between them to get the best prices at each point.

There's a great post by Mike Nolet of MikeOnAds on this subject, where he talks about how his previous company, RightMedia, handles the ad-network-to-ad-network optimization of revenue.

The key image from Mike's post is below:

What you're seeing here is that as user frequency increases, the monetization between the 3 networks (small/medium/large) is different. Ideally you'd start out on the small network, then go to the medium one, and then go to the large one in order to monetize for that CPM.

My personal experience (while at Revenue Science) working with the MySpace ad ops team led by the fantastically smart David Dipilato was that they juggled more than a dozen very large networks in order to maximize their revenues. This level of expertise in ad ops is a very hard skill to train and hire for, by the way.

Stage 5: Building up brand sales (rep, vertical, direct, or otherwise)
Once your site hits a certain level of ad inventory – and that number's certainly over 50M/month and maybe even several multiples of that – it's likely that you'd want to go after brand dollars. The reason is simple: remnant ad networks bring in CPMs in the dollars, whereas brand can take you into the tens of dollars. The problem is that the process of doing brand ad sales is very foreign and specialized, especially to folks who have thus far focused on technology, automation, and scalability. Brand sales is like enterprise sales – it's slow, custom, and not technology-intensive at all. To win you focus on excellence in sales and marketing operations.

Here are some of the common options for getting brand dollars:

Old school ad networks
Generally most folks get started through their existing ad networks, which start to rep their inventory as part of a brand category. This can happen if you're a tech blog and they sell you as part of their "Technology channel." You'll end up seeing these dollars mixed into your overall ad network CPMs, and hopefully they boost your aggregate numbers into something good!

Vertical ad networks
Another way that's getting much more common now is to get into some sort of vertical ad network like Glam.com or Jumpstart or whatever is appropriate for your site. (Glam = women and Jumpstart = cars, btw). These guys are far more sophisticated and specialized, and commonly move a ton of ad inventory as part of their business models.

Direct sales teams
Similarly, many companies go out and hire their own sales teams, or engage ad reps who already have those relationships. This is a hugely expensive process, but that's how the big money comes in.

Once you get your brand sales going, the site you're running will need a dedicated team to manage the active campaigns. The different ads coming through the system need to be carefully and constantly checked to make sure they are delivering in a timely manner, that they are running in the right sections, and that whatever performance metrics the advertiser is using goes well.

On the revenue side, you can no longer make little tables of inventory and use that to predict revenue. It's common that a very small % of ad impressions generates a sizeable % of the revenue. I've heard that some sites sell 5-10% of their impressions as brand ads which account for 30-40% of the revenue, for example. The right way to think of this is that your ad inventory ends up being a pyramid with the best stuff on the top and the worst stuff forming the base. 

So ultimately, you track the ad campaigns that the ad sales team is selling and your ad ops team is running exactly like an enterprise system. You have a sales pipeline with different campaigns going through based on RFPs your team is getting, and eventually once those flight, the revenue comes into your company.

In summary
There are many complexities in squeezing out the most dollars from your ad inventory – it's something that even big media companies struggle to master as they grow. Much of the process of doing this smoothly involves making sure you don't try to solve hard problems until they really become core to your business – for example, don't hire a big ad sales team before you have enough pageviews. Similarly, it's important to understand the implications of how your product ultimately impacts the monetization – social products, for various reasons, tend to monetize poorly and that needs to be built into your business model from Day One.

For more essays on advertising, social network monetization, and more, check out my directory of essays here.

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.

Moved the blog to http://andrewchen.co

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