How To Start A Social Networking Website Part 5: Estimating Revenues for CPM Ads

by Peg Corwin

 

Once launched, how much might a niche social networking site earn from advertisers? The purpose of this post is to give those developing financial forecasts and business plans for niche social networks some basis for projecting revenues.

Since it takes lots of eyeballs to sell ads for flat fees, the prevalent advertising model for new social networking sites (aka “publishers”) is CPM, or cost-per-thousand impressions (page views.)

In essence, the formula is click-through rate times the cost per click per 1000 impressions. (If you’d like a detailed explanation and example of CPM calculations, see Wikipedia’s definitions.)

The graph above is the PubMatic Ad Price Index, which I reference for the big picture. Although too small to read, the data suggest that for small websites generally, the average CPM price was $1.18 in March 2008 and $1.29 in April. This is “based on anonymous data from over 3,000 publishers who work with PubMatic for ad network.” “Small websites” are defined as those with less than a million page views a month. This also includes all types of sites, not just social networking sites.

In this post, I round up comments from experts on typical CPM ad revenues for social networking sites in early 2008. My format is to display headings that are blog post titles, then quotes giving dollars and cents CPM numbers, and finally the blog name with date of quote. Follow the heading links for details.

 

The Future of Social Networks

“Industry insiders at the conference [ReMIX Silicon Valley, April 2008] said they see CPM rates of between 10 cents and 50 cents per thousand for social networks, but it can go much higher ($2.00 to $5.00) for highly targeted demographics.

“Is Web 2.0 financially viable? A small moderately successful software company can generate $12M in annual revenues by focusing on a narrow niche market. What would it take for an advertising based Web 2.0 company to generate the same revenues? Lets assume a $2.50 CPM rate. To generate $1M in monthly ad revenue you would need 400,000,000 monthly page views. Hmmm…how many web sites or services generate that kind of traffic?”

Don Dodge on the Next Big Thing. April, 2008

LinkedIn’s CPM rates lower than reported $75, but still impressive

“Seems comments made by Kevin Eyres, managing director of European operations for LinkedIn, were optimistic in pegging ad rates at a $75 CPM. To a degree. A customer who’s bought advertising on LinkedIn wrote in to let us know that last fall they negotiated a campaign to run ads against the social network’s “premium content” for a $12 CPM, $3 less than the listed $15 rate. The company is now charging $45 for that same inventory, they report. A quick look at the rate card shows that the $45 price point is for vertical banner ads targetted to IT and small business professionals. Custom targeting goes as high as $76.50 per thousand impressions. Good thing to know that you can bargain down those rates 20 percent. And it’s still an order of magnitude more than any other social network has been able to charge.”

Jackson West, Valleywag blog, Silicon Valley’s Tech Gossip Rag April 30, 2008

5 factors that determine your advertising CPM rates

Andrew Chen gives this rough rule of thumb:

” * 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

“Because we were mostly dealing with so-called “remnant” advertising, these numbers are likely to be at the bottom of the range for these sites. That is, social networks might quote a CPM of $20 CPM, but what they really mean is that 1% of their inventory is sold at that, and the rest of the 99% is sold at <$0.25 prices.”

Futuristic Play by Andrew Chen: Thoughts on viral marketing, user experience, game design, and online advertising

5 things that make your social network monetize like crap

Andrew Chen makes the point that ad inventory isn’t homogeneous, it’s a pyramid:

“Sometimes you might hear the CPMs for one of these social networks is X dollars. And that’s true, it’s exactly the price that SOME people are paying for the inventory. But in general, that’s not how publishers end up managing their inventory. Instead, if you take the impressions for a user across their session, you’ll instead get something like this:

* The first US impression in a session has the most value ($10)

* Then impressions 2-5 have some level of brand value or high CTR value ($3-5)

* Then after that, you’re hitting ad networks selling on category ($1)

* Then eventually, you hit remnant ad networks ($0.50)

* Finally, you hit pure CPA remnant networks ($0.10)”

Futuristic Play by Andrew Chen: Thoughts on viral marketing, user experience, game design, and online advertising

 

To those who really know what they are doing in online advertising and those checking what I’ve said about their blog posts, it should be obvious that I’m at the bottom of the learning curve in this area. But I’m gathering and posting information for entrepreneurs who are just stepping on the curve. Are there better indexes? Where can a niche website owner go to develop better estimates, maybe by topic area? Please add something to enlighten us all with a post.

Related Posts

Part 7: Alternatives to the Advertising Model?

Part 9: Adsense, Ad Networks and Direct Sales

Part 12: Against the “Freemium” Biz Model

See all 18 Posts in This Series

How to Create a Social Networking Website Series has 18 posts on various aspects of this topic.