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Charging for Your Product is About 2000 Times More Effective than Relying on Ad Revenue

Posted by Bob Warfield on February 22, 2013

BootstrapsI was reading Gabriel Weinberg’s piece on the depressing math behind consumer-facing apps.  He’s talking about conversion rates for folks to actually use such apps and I got to thinking about the additional conversion rate of an ad-based revenue model since he refers to the Facebooks and Twitters of the world.  Just for grins, I put together a comparison between the numbers Gabriel uses and the numbers from my bootstrapped company, CNCCookbook.  The difference is stark:

Ad-Based Revenue Model CNCCookbook Selling a B2B and B2C Product
Conversion from impression to user 5% Conversion to Trial from Visitor 0.50%
Add clickthrough rate 0.10% Trial Purchase Rate 13%
Clickthrough Revenue  $      1.00 Avg Order Size  $ 152.03
Value of an impression  $ 0.00005  $      0.10 =     1,976.35 times better

Let’s walk through it.

Both sites have visitors who convert to something more.  In the case of the Ad-Revenue model, presumably it is a person who creates an account on a Facebook or Twitter-like site, thereby becoming a user.  Gabe says that conversion rate for a really strong property might be 5%.  It can be much lower, like 1 to 3%.  I went with the optimistic 5%–the model is already too hard to contemplate 1%.  In the case of CNCCookbook, the conversion is from visitor to Trial user for the software.  We have a 30 day free trial on all our products.

From becoming a User or Trial User, the next conversion rate is monetization.  For the Ad-Revenue model, I did a quick search for clickthrough rates on display advertising and came up with 0.1%.  Sure, you might get your Users to click on more than one ad over time, but let’s just keep these numbers simple.  They’re not going to click on 2000 ads to even the score, after all.  For CNCCookbook, we have a very high conversion rate from trials–about 13%.  I view that as a commentary on the high quality of our software–people like it if they try it.  I understand conversions in the 5% are more common, so you may be forgiven for deciding the ad revenue model is only 1000 times less effective than charging for a product.

Okay, given those conversion rates, we take the average revenue per transaction and multiply all that on through to find the value of an impression.  What is it worth to you to bring another visitor to your site?

In this analysis at least, it’s pretty easy to see why bootstrappers need to be charging for their products and not relying on ad revenue.  Unless you just happen to have an amazingly viral product, it’s just too hard.  You have to rack up way too much traffic to get to interesting revenue levels.

Or, to put it like 37Signals:  Charge for your products, Dummy!

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4 Responses to “Charging for Your Product is About 2000 Times More Effective than Relying on Ad Revenue”

  1. [...] want to find out if anyone wants their cherished vision. There is a good comparison of the difference on Smoothspan and several good links to other references. But that still doesn’t answer the question – how do you price a product? There is a [...]

  2. [...] want to find out if anyone wants their cherished vision. There is a good comparison of the difference on Smoothspan and several good links to other references. But that still doesn’t answer the question – how do you price a product? There is a [...]

  3. […]  Fuhgeddabout it.  No hope in heck.  I’ve estimated that charging for your product is about 2000 times more effective than giving it away free and relying on advertising revenue.  Why make your job 2000 times harder?  It’s so attractive to sell Free until you realize […]

  4. […]  Fuhgeddabout it.  No hope in heck.  I’ve estimated that charging for your product is about 2000 times more effective than giving it away free and relying on advertising revenue.  Why make your job 2000 times harder?  It’s so attractive to sell Free until you realize the […]

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