Advice for startups on how to make money from online advertising

Over the past few months, I have been approached by a number of Canadian online startups for advice on how to make money from online advertising. The most common question I get is “when does it make sense to start selling ads on my website and how do I do that?” Since so many digital startups want to know, I thought it would make sense to write a blog about it.

Here are some helpful steps to take and options to consider:

1. Determine your monthly unique visitor traffic
Typically, advertisers (and their agencies) won’t be interested in buying premium ads on your website until you’ve hit a certain traffic threshold. That threshold may vary depending on how niche your content is. However, I would suggest that 50,000 unique monthly visitors is likely a good benchmark. Until you reach that threshold, I recommend thinking about alternatives like sponsorships, affiliate partnerships, barter deals, Google Ad Sense and product placement instead. See my notes below on  these opportunities.

Advertisers usually want  to see data from third-party online media measurement companies, rather than your back-end data from Google Analytics or Omniture. In Canada, they typically want to see data from DoubleClick Ad Planner gives you a good third-party estimate of your traffic.

2. Calculate what your traffic is worth
I would recommend that you calculate the potential advertising revenue of your website before deciding whether it’s time to start selling ads directly to advertisers. This will help you to determine the cost benefit of putting a lot of resources behind selling, managing and reporting on ad campaigns versus selling sponsorships, working with Google Ad Sense or being represented by an ad network.

A quick way to do this is to look at the total number of pageviews that you have on your website. Then, estimate the number of ad units that you will have on most of your pages. I usually estimate it at 1.5 ad units (because you may have one or two premium ad units plus one or two additional ad units that may not be in a premium position). A lot of publishers estimate the price at an average CPM of around $12.00 to do their estimates. That is because you will have some ad inventory on your website that could be worth $30.00 per thousand ad units (CPM) but a lot of it will only be worth $3.00 – $5.00, depending on placement.

Also, be aware that when you are starting out, there will be a ramp up period for getting advertisers to pay premium dollars to be on your website. Be prepared that you may not get the premium CPM price that you want until there is enough demand for your content.

So, the calculation involves multiplying your total number of pageviews, times 1.5 ad units and then times $12.00. Once you have that number, divide by 1,000. The formula looks like this: (X number of pageviews * 1.5 * 12) / 1,000. This is a rough estimate of what your inventory is likely worth and a good starting point for figuring out your next move.

3. Flat fee sponsorships
If your traffic is currently below the suggested traffic threshold, you may want to consider selling a flat fee sponsorship. That’s because it will likely end up costing you more to do the work to manage the ad campaigns that you sell, than what the advertiser will ultimately be willing to pay for your inventory. I recommend that you charge a flat fee for a sponsorship for all or a particular segment of the content on your website.

If you are planning a special feature or promotion for your website (i.e. a contest or a special promotion), I recommend that you seek out an advertiser who would be interested in co-branding opportunities or even possible affiliate or barter deals. In addition, eNewsletter sponsorships can get you a decent CPM but the key is to have a big distribution list. So, start building up an e-mail user base now and get people to opt-in for e-mail messages from sponsors.

4. Google Ad Sense
There are pros and cons to putting Google Ad Sense ads on your website. The pro is that you can start to make money right away from the inventory on your website.

The con is that it makes it tougher for you to convince advertisers to buy premium ads with you when they can buy ads via the Google Content Network on your website for a cheap CPM. You need to decide what works best for you and whether you need the Google Ad Sense money for short-term profit or if it is part of a long term strategy. Many advertisers only put their less premium inventory onto Google Ad Sense.

5. Affiliate partnerships
Another option that you can consider is making money for sending traffic and leads to other websites to help them drive sales. This is called affiliate partnerships. If you have very niche content that caters to a specific type of customer (i.e. beauty tips, mortgage rates, etc.), then certain retailers, automotive companies and even financial institutions may be interested in developing an affiliate program with you where you may share revenue from the sale or be paid on a cost-per-lead basis. It’s worth investigating potential affiliate partners in the industry in which your website is serving.

6. Ad Network Representation
When you are just starting out, it can be tempting to seek out advertising network representation. Ad networks will also want to know if you’ve met a certain traffic and page view threshold before they decide whether they will want to represent your website. In terms of page views, you’re likely going to be appealing to direct sales ad network if you have reached roughly 500,000 monthly page views or more (even better if it’s closer to 1 million). Once again, there are pros and cons to having a larger ad network handle the advertising sales on your behalf, rather than selling the ads yourself.

The pro is that if you do not have the expertise or resources to go out and sell the inventory yourself, you can have someone else handle it while you focus on growing your business and the traffic to your website.

The con is that you will likely have to share up to 50% of the revenue with the ad network because you likely do not have enough traffic volume at this time to justify a bigger revenue share model for yourself. The ad network will likely want to sell your inventory along with other similar content in their network in order to get your website on the advertising buy. This means that they may sell your inventory at a lower CPM as part of a larger advertising buy.

Ad networks need to justify that your inventory is complimentary to the other websites that they are selling and whether it is worth the effort to sell your website for their financial gain. If you do choose to go down this route, it is worth your time to shop around a little to see what is out there.

There are no right or wrong answers for choosing one advertising sales channel over another. These are just some recommendations and guidelines about how you might get started. I’d love to know what other questions that digital startups have about making money from online advertising. Please leave a comment if you have a question.