Traditional & Online Advertising

(a rant by Rob Ludlow 11/20/03)

The advertising demographic of my site is very geographically and age targeted: College Students

I attempted to contact local business’s regarding advertising a while ago when my site was much smaller, and the reception wasn’t so good. It seems that many brick & mortar / mom-pop shop businesses are afraid to try internet advertising.

I’ve also noticed that many are paying through the nose for ad space in the local school paper. I believe I can more than beat that price. I’m an MS Excel freak and love to analyze all kinds of data, so I did a few calculations.

There seems to be quite a bit of debate about the transition from traditional to online advertising. There are many schools of thought regarding the terminology, the metrics, and how to convert old school ideas into this thing we call online advertising.

My first experience was trying to sell local advertising for my site to local advertisers. I visited the school paper and got their ad rates. I rushed home booted up my pc, got into Excel and started off into converting the newspaper rates into CPM rates. Here’s the info I had to go on:

The school newspaper had multiple size formats available, so I used the small size ad which was $46 a week. There are 11,000 copies of the paper printed, 5,000 on campus 6,000 off (I’m not sure of the number that are actually read). Excel tells me that $46 / 11000 = .00418 for a CPM of $4.18

So, what’s the problem? Well I started to wonder… Should I compare this to my site’s impressions, or unique visitors? When someone picks up the newspaper and sees the ad a few times is it counted as multiple impressions? Another problem: What if the average person only looks at 75% of the newspaper? Those ads were never seen… an impression was never made yet the advertiser still paid for that ad in that paper!

I’ve also tried to work the pricing from the advertiser’s point of view. I did this by using the click through rate and conversion rate of a local business’s ads, and determined a CPM that would make it cost effective for them to advertise. I realized that for an average product price of $5 – $10 I couldn’t justify a charge a $15 CPM, or even a $5 CPM because my analysis seems to show that it wouldn’t be cost effective for the advertiser.

I read a post in an online forum that said “there are still tons of sites that charge more then US $50.00/CPM for ROS and as much as US$ 120.00/CPM for target Categories.”

I had to look up and check the date on this post… 11/26/02?!?!? I thought I was back in 1998 for a second. I can’t even comprehend how a company could justify $50 CPM let alone $120 CPM for an advertising campaign.

For example, using the very high $120 CPM and BEST case scenario that I can imagine for ROS banners using very high CTR and Conversion rates I get:

200,000 Impressions
$120 CPM
3% CTR = 6,000 clicks
2% Conversion = 120 sales
Cost per sale = $200

If I’m high or low on any of these numbers PLEASE let me know! From my research industry averages are all over the place, but IMHO I can’t imagine any ROS campaign getting a CTR of higher than 2%. Am I wrong? I’m open to being wrong. It has happened before… once I think! 🙂

So, if my numbers are close, then a company has to have a pretty high profit margin to cover their advertising expense and justify such an expensive ad campaign.

Using averages from what I’ve seen online and the lower amount of $50 CPM I get the following:

200,000 Impressions
$50 CPM
.1% CTR = 200 clicks
1% Conversion = 2 sales
Cost per sale = $5,000

I don’t know too many local advertisers that can justify $5,000 per sale. I also have a theory that the higher the profit margins on the item, the lower the CTR and Conversion rates will be.

Now, let’s plug in the newspaper rate of $4.18 CPM. Unfortunately this is the hard part… converting to CPM and CTR so I’ll use values from above:

200,000 Impressions
$4.18 CPM
.1% CTR = 200 clicks
1% Conversion = 2 sales
Cost per sale = $418.00

Below is an example using real world experience with a company that advertised on my site. They paid $0.75 for a large ad contract to advertise on school specific pages (I’ll use 200k impressions to be consistent).

200,000 Impressions
$0.75 CPM
.3% CTR = 600 clicks
3% Conversion = 18 sales
Cost per sale = $8.19

This model showed that it made sense for the advertiser to advertise on the site (based on their internal ROI), but not all offline advertisers see the picture.

All these abbreviations CPM CPC ETC. are very confusing to the traditional business owners and humble brick-n-mortar shops. It has been suggested to simplify the online pricing model for offline merchants. For example, the school newspaper sells an ad space for $184 a month to 11,000 readers. If my site has 11,000 unique visitors a month I should sell the advertising on a monthly basis of $184 (or comparable rate). This makes it easier for the offline advertiser to wrap their head around the concept of online advertising and allows them to compare apples to apples.

The bottom line is to determine how to bring traditional and online advertising to a comparable model and base rates in a way that makes sense to you and to the advertiser.

CPM – Cost Per Thousand (M = Roman numeral for 1k)
CTR – Click Through Rate
ROS – Run Of Site