ThoughtCatalog’s Alex Magnin does a great job describing the challenges of the ad supported business model for start-ups in his opinion piece Dear Silicon Valley, Ads are the Hard Part. The prevailing business model with most Internet start-ups reduces to this statement: ”We are working on building a great product with a large audience and then we will monetize with advertising dollars.” Nothing wrong with this model. However, it seems that start-ups continually underestimate the amount of time required for a meaningful advertising revenue stream to appear. To my (admittedly hyper sensitive) ears I hear “just throw in ads when the hard stuff on the product is done.”
I’ve worked with hundreds (not an exaggeration) of internet start ups over the past 10 years and I can say that 99.9999% of the time this idea of “build it and the ad dollars will come” radically underestimates the complexity of ad monetization.
So how should an entrepreneur plan for an ad-supported business? What follows is my (now canned) speech when someone asks me about this.
Overnight success with an ad-supported business really takes 12-36 months. It takes a relatively large investment up front and you won’t know how well that investment is working for at least 6 months. When it works well it looks like this:
Phase 1. You hire sales and marketing leads who figure out how to translate your product offering into something that advertisers understand and appreciate. While this is happening, your small sales team is in market working to get the attention of advertisers and their agencies. Success in this stage is firming up a winning, unique and defensible sales proposition, getting time with the right advertisers, and getting asked for proposals.
Challenges: The people who you want to hire are in very high demand and will be very expensive (think 1-3 developers expensive.) The number of people all asking for the attention of a small group of advertising buyers is more than anyone can handle. New partners or “test budgets” are the first part of an ad budget to cut so you can spend a LOT of time in positive conversation before you are even invited to propose for future business.
Phase 2. Once you’ve gotten ad buyer’s attention and been asked to submit a proposal, the ad buyers rarely buy on the first pass. Instead, they evaluate how you price and package your offering and how professional your team is in working through this process. Often, the proposal reveals information that can be put into a POV for their client/boss should your company come up in conversation (“What do you think of x?” or “Should we be working with y?”) Often, the POV will be “Interesting but let’s see how they progress before including them in the mix.”
Success in this stage is proving the professionalism of your team and getting positive traction on your pricing and packaging of whatever it is you are selling. You want to move beyond interesting to something they need to test.
Phase 3. You get an ad buy. Typically the buy will be smaller than you’d like. Small depends on the overall budget of the advertiser. A multi-national CPG or automotive brand could put together a six-figure test but all too often you are working with five figure investments and sometimes less. This is the all-important test. Does the ad perform? (Performance could mean a wide variety of things to different advertisers.) Did the campaign go smoothly? Did I get the client service I need? Do I like these people? (not the company, the people working with me.)
Success in this stage creates momentum for a serious investment in the future.
Phase 4. Following a successful test you can expand future deals both in duration and in size of investment. Sometimes this ramp can be very quick. Sometimes you need to wait a year for a seasonal advertiser. Provided you see a number of partners experiencing success, this is where your business can grow very quickly. It is much harder to sell your first $10 million in advertising than it is to generate then next $20-25 million.
Success in this stage is in creating solid, strategic relationships with key advertisers in your category. You are now stealing dollars from established partners as you have created a stronger solution for advertiser’s needs.
Phase 5. You become an established leader in your category. New clients come in and spend more money more quickly because the early advertisers have established you as a viable place for their budget. The product you’ve developed provides all sorts of case studies and learning’s that help you grow your business. Perhaps most importantly, it is now easier to recruit sellers, ad support players, etc.
Radically change your proposition through a product or business model pivot? Go back to phase one. Tackle a new market that isn’t adjacent to your current market? That initiative starts at phase one. Introduce products bought by different people? Go back to phase one.
That’s it. Overnight success in advertising. Of course having a great product is important and advertising and product teams ultimately need to work together for a company to succeed. That said, the history of the Internet is littered with great products that never found a winning ad model.
Feel free to share this post with anyone who thinks that a truck full of money immediately follows you posting ad tags on your site.