How to Calculate Startup Advertising Revenue

Startups usually believe they’ll make money in one of two ways when I ask them: advertising revenue or venture capital (I also believed the same thing, so this isn’t me saying “well you suck”, this is me saying “learn from my mistakes”).  Even if you are planning on raising venture capital (if you need it, you might not), you need to be able to explain how your startup is going to generate advertising revenue.  So if your business model is dependent on ad revenue, you’d better know what you’re talking about.  I’ve jotted down everything I know about it, all the if’s and but’s, and how to calculate startup advertising revenue.  I’ve even included some real startup graphs that had business models dependent on advertising revenue to bring you back down to reality!

Startup Advertising Revenue

Search Quora, millions and millions of startups believe every year, the path to profit for their internet startup is advertising revenue.  And very, very few startups really understand how long it takes for a company to get to advertising revenue.  So let’s get one thing clear, unless your startup went viral (which is very unlikely) there is no such thing as startup advertising revenue.  There is a such thing as advertising revenue, but not startup advertising revenue.

How to Calculate Advertising Revenue

The CPM depending on your target market can be anywhere between $1-$40.  If you are B2C, that will likely be less than $2.  That’s not per pageview.  That’s not per click.  That’s cost per mile.  Which is how much your startup makes for each 1,000 ad impressions.  Ohhh….those revenue projections are looking very different now, huh?  Here is what I calculate for 100,000 monthly pageviews in a B2C sector:

100,000/1,000= 100 x 2= $200/month average per advertiser

$200/month x 10 advertisers= $2,000/month

I am an optimist, and this is just a quick napkin calculation.  So you’d probably want to cut that in half (Facebook’s CPM is 50 cents).  That’s about how much you would make.  Not bad, if you call $2,000/month good revenue.  It’s an ok start, it gives you a place to calculate future growth.

Now, if you are B2B you can safely estimate about $40 per CPM per advertiser, but depending which B2B sector, you could go up to $80.  Sounds great, right?  Well there is a level of strategy that has to be put into this to make it work.  The numbers depend on the value of the audience you’re bringing in, and the value of the keywords you target.  You also have to factor in competition levels, etc.  B2B also does not usually “go viral” (meaning no, CEO’s & most business executives don’t haunt Facebook all day) so you can have to pray that those traffic levels keep going up.

How Long Before a Startup Can Make Advertising Revenue?

Keep in mind, it will take you about 2 years of constant internet marketing to get to 100,000 pageviews a month.  Here are a few real examples I borrowed for traffic graphs.  I want you to know, that unless you are Facebook or Pinterest, it’s about 1000x more likely your organic growth (with about 25+ hours a week of your awesome free traffic producing skills) will really look like  this:

internet startup growth

I borrowed this from one of my good friends.  It took this guy 9 years to really make any headway.  Around 2009 (6 years later), he started generating his first advertising money.  Around 2010 he reinvested ad revenue, and built a product.  By 2011 his blog had turned into a full fledged company pushing over $10MM in annual sales & services.  9 years later though, it’s not an overnight thing like everyone thinks it is.  Here is our own growth, keep in mind I have done this before, in the same market since I was 19, so I didn’t have that 4 year discovery phase:

Internet Startup

That’s our traffic projections for the end of 2012, as long as we don’t loose traffic, we’ll hit it….had a few close calls with Google algorithms changing on us already…but that’s a story for another day.  I have managed to make money off of affiliate products here and there, enough to keep the site going until this year.  Keep in mind, the first year, despite knowing what you’re doing, you have uncontrollable factors; such as gaining credibility with search engines, communities, etc.  This year we have our first real advertisers coming on board.  So, 2 years for me.  I’ll likely do the same thing my friend did, reinvest in a product, and expand into services as well.

Skills Your Startup Needs to Pull It Off

In order to have a company with a successful business model dependent on advertising, you’ll need a few special skills of your own:

  1. You need to be very talented at producing large amounts of traffic for free.
  2. So much so, that your advertisers couldn’t just do it themselves (ie: competitive advantage).
  3. This means your hiring focus needs to be put on generating this traffic inhouse.
  4. You need to bring value back to your advertisers (your relationship with advertisers is B2B)

You also have to consider, you have two sides to the coin, and the chicken and egg problem.  You need customers in order to have advertisers, and if you’re building a product, then you need to have a product in order to have customers.  Whew, huge line isn’t it?  Just remember, advertisers always come last.  That means you have a long way to go to revenue.

The concept of advertisers and products is also somewhat counterproductive.  You can see alot those issues with Facebook.  When users are there to use a product, they typically have little interest in clicking through on ads.  But then again, if you were large enough, I’m sure we could always come up with a million ways to generate revenue from it.  And…digital advertising is booming:

calculate startup advertising revenue

So just some things to keep in mind, but by all means…don’t let it stop you.  Please make sure you think about all these things though, especially if you’re fundraising, don’t get caught off guard when they ask you these questions.  Because you can guarantee, an investor is going to tell you the same things I’m telling you.

Consider Multiple Revenue Streams for a Startup

I like it that alot of you have a focus on revenue, but I’m also a big fan of multiple revenue streams for a startup company as well.  It’s like your household income.  How secure do you feel if the sole source of your income is a paycheck coming from the same company?  What if your wife doesn’t work, you have no savings?  You’re relying on one source, and your risk is high.  Same with startups, it’s great to have a focus, but strive to think outside the box with revenue, so all your eggs aren’t in the same basket.

Good luck!