Sangat Pedas

A Paradoxal Business Model Called Online Advertising


Yesterday I gave some excellent tips on how (not) to pitch your startup, good stuff! One of my points was it’s better to say that you haven’t quite figured out your business model instead of saying advertising is your business model. Internet addict Okto, better known as @labanux, asked me why. Why is online advertising as a sole business model so bad? Google, Facebook, Twitter, Kaskus, Detik and many many others run on online advertising so is it really that bad a business model?

Ever been to a restaurant where one waiter welcomes you and another waiter tells you the neighbors have great Japanese food? Ever been to a boutique where, before you bought anything, the sales person tells you two blocks down you can get 20% discount on an iPad? Well, chances are slim that this happened to you in a brick and mortar store but it happens online. Entrepreneurs on one hand do their utmost best to get more people to visit their site or use their app to then show them the way out with a banner or ad. Though this is a black and white interpretation of something that has more shades, it’s basically the paradox of using online advertising as your business model.

For Google this is not a problem at all, this is actually exactly what Google is build for, pointing out where people can find what they look for. Getting paid for exactly that is great and as long as ads are relevant users don’t mind as well. So search engines in general are perfect for integrating online advertising as long as it connects to what the visitor is looking for. Obviously Google has after years perfected this model and is the undisputed king in online advertising.

Twitter I think is a bad example. I see promoted tweets, promoted accounts and promoted trends totally different from the usual advertising. With these promotional services people stay on-site and basically they get paid for connecting people or read tweets. Pretty much perfect but it still has to be proven to be a sustainable profitable business model.

For sites where one of the goals is to let visitors engage in the service showing ads accomplishes exactly the opposite. Now if your a media portal like Yahoo or Detik things are slightly more nuanced. Both offer news or any other kind of content to attract visitors which they then aim to monetize through showing ads and banners. There’s not much of an engagement requested from users, same goes for sites like Flickr, Youtube and other content sharing sites.

Surely one can make some money on advertising but to make advertising your business model you will need a critical mass. You need a true shitload of visitors to be able to make some serious money which is enough to build a profitable company. You will even need much more when you’re operating in an emerging market where CPM/CPC’s and fill rates are mostly much lower.

A quick calculation which is pretty accurate for the Indonesian market where the website is only in the Indonesian language:

CTR: 0.1% (average click-through-rate)
RPC: $ 0.03 (revenues per click)

These KPI’s show you need 1000 pageviews to make a mind blowing $0.03 so in order to make $100.000 you need more than 3 BILLION pageviews. And let’s be honost, if you have 3 billion for sure you’re operating cost will be much higher than a measly $100.000.

So how do they do it? Why do companies like Yahoo and Detik make lots of money on advertising? Well, once you have a critical mass and you’re in the top of the hierarchy the advertising game changes. If you play your cards right, like Detik certainly did, you will attract A-brands who are willing to pay much more. Your ad space becomes prestigious, recognized and wanted by many marketing managers who want to make sure their over-seas Japanese CEO sees how good a job he’s doing.

So in effect, instead of earning $0.03 per click, companies like Yahoo and Detik earn $0.75-$1 per click. I’m using the words “in effect” because these companies mostly use a CPM or sometimes even time based price models which makes them more independent of the quality of the message and product their advertisers offer.

Facebook is now “re-wrapping” and pimping their market place ads giving it a golden shine and trying to sell it for 8-times the price you pay on the market place. However, in my opinion Facebook has made the mistake of basically let everyone advertise any kind of product. Result is that it’s not an “exclusive” destination for the A-brands advertisers who are willing to pay the big bucks. So these A-brands seem to shy away from Facebook and prefer portals like Yahoo or f.i. the reputable online newspapers where it’s just more sexy and exclusive to advertise.

Though every entrepreneur will be extremely optimistic about the growth projection of their startup, some realism would be in place too. Chances of your site becoming the next Yahoo or Kaskus are pretty slim and why should it? I see some companies in Indonesia no one in the “scene” talks about because they’re not big in terms of visits and don’t care about the attention. But I can share they make a truly impressive amount of money because they’re actually selling products and services and are successful at it.

And then there’s the issue of “over-monetizing”. Don’t get me wrong, I love Detik and the team. But let’s be honest, in my opinion the number of banners on their sites is just over the top to a point where it starts to become a serious annoyance for their visitors. Unfortunately for Detik they don’t have a monopoly so companies like Vivanews and Inilah are catching up because they offer a more clean site and more pleasant user experience. So even if you have the critical mass needed you need to be extremely careful and find the right modus and balance.

So Okto is right in a way that there are plenty of companies who are making money solely based on an advertising business model. But investors shy away from it mostly because of the reasons as described above. Nothing wrong with earning some extra money from advertising. However, if you’re app or service is that good you should be able to monetize it in another way which will be much more profitable and sustainable without showing your users the way out.

UPDATE: Read @treespotter’s post on Dailysocial about this topic.

  • William Henley

    Pertamax…. Eh, bukan KasKus, ya??

  • Natali Ardianto

    I agree with you on this. I’ve lost my faith in ads business model. I always say “ads pie are 80% eaten by and, so you tiny startups are fighting for the 20% share.”

  • Okto Silaban

    Great stuff as promised..!

    “in my opinion the number of banners on their sites is just over the top to a point where it starts to become a serious annoyance for their visitors” Soo true.. just like this > ;)

  • someone at media business

    Hi there, sorry for being anonymous :) )
    i will try to explain in my point of view about this ( and will be in bahasa hahaha )
    Online advertising saat ini di indonesia masih sangat di fase jauh dari kata mature, kenapa begitu… gue yang ada di industri mengatur spending digital di Indonesia merasa gue gak punya opsi yang banyak disaat ada client yang menggelontorkan dana yang besaaar, waktu yg pendek dan target yg semi niched. Dengan uang tsb mereka mengharapkan bukan hanya CTR yang tinggi tapi CPA… Artinya disaat menentukan lokasi gue harus yakin betul kalo target gue emang dateng ke situs yang akan gue spending. Pada kenyataannya majority traffic terbesar itu dimiliki oleh situs berita, padahaaall gak semua target yg pengen gue capai itu mau baca berita ( especially politik ). Jadi situasinya budget kegedean sementara opsi yg diberikan sangat sedikit. - cara cepat yg dilakukan sekarang gue spending a lot of banner with NOT REASONABLE PRICE ( A.K.A Front page banner that will annoyed you )

    menanggapi tulisan “Ever been to a restaurant where one waiter welcomes you and another waiter tells you the neighbors have great Japanese food?…” in my experience dan understanding is.. based on standard journey… setelah orang menyelesaikan keinginannya dan keingintahuannya yang sudah pasti tidak bisa di fulfill oleh situs berita yg di tuju maka dia akan memiliki intention mencari sumber yang lebih. Disini yang gue coba bicarakan adalah contextual, pengalaman mengatakan banner di depan itu CPAnya sangat2 rendah jika dibandingan CPA banner didalam sebuah artikel yang related dengan promosi yg ditawarkan. F*ck with quantity ( CTR ) We need quality engagement!.

    jadi my point is, opportunity untuk Online Adv bismod masih sangat terbuka mengingat kasus2 diatas dan kabarnya online spending di indonesia tahun depan akan mencapai 1,2 trilyun rupiah!. Jika kita diberikan opsi selain situs2 yang terlalu general audiencenya, kita membutuhkan situs/placement yang bersifat lebih vertikal dari sisi segmentasi dan local technology yg bisa membuat contextual ads ( like a google banner ) dan kita lebih prefer lokal, yang harusnya lebih murah, lebih bisa mengerti local insight dan kemudahan pembayaran pastinya :) )

    so people… go with the online advertising model, but make sure you are in the right path by knowing the problem in our industry and … again…please be more realistic

    • remco

      Hi, thanks for your response and participating in the discussion though it would be nice if you weren’t anonymous. You’re comment is honest and professional so sharing who you are would probably only be good for you.

      But anyway, I think our opinions are pretty much the same. I don’t say people should not advertise online or publish ads. My main point is that choosing for a business model solely based on advertising for your startup is not a good thing. As you can see in Tokobagus, also we publish ads but it’s a minority of our projected income and we try to balance it so it doesn’t become annoying to our members.

      • someone at media business

        i wish i have that kind of luxury ( being more open )…

        in my latest point i’m saying is still good to make “startup” and a business model based on advertising model but make sure you know the real problem and opportunities in Indonesia.
        In my industry ( the spenders ), we need more options… so i can stop buying a stupid banner ( banner who act like a billboard in conventional ) in front page at some huge news portal

        • remco

          Well, that’s actually a strategy we agree on, there’s much more creative ways of advertising than just a banner. We’re looking at product integrated ways of advertising like f.i. Twitter does.

          • someone at media business

            Before its going nowhere…
            i need to emphasize my point bro…
            I do not hate a banner, baner is still the most important touch point ( just like a tvc at conventional )
            But since we are in digital, we hope we can do more targeted.
            what we need is a more options ( media placement ), we need more sites/webapps/whatever with segmented audience to put my specific banner in a near future :)

            LONG LIVE CPA!! *LOL*

  • Pingback: Sangat Pedas + - Sangat Pedas

  • Pingback: 5 #Startup Rules I Will Follow In 2013 - Sangat Pedas