There’s no one out there that loves the recent advances on the web more than I do. From a user standpoint, “Web 2.0″ is all about innovative technologies that push the boundaries of the web without costing a cent. From Flickr to MySpace/Facebook, Google Apps, and YouTube, one common denominator is that they are all free. And that’s awesome - if you are a user. But what about if you are a development company? Those rare successes have baited us into thinking that online advertising is a really viable business option. From my experiences, it’s as much fools gold as relying on someone to buy your business out to make a profit.

Our SportsLizard Price Guide is just about to pass the 20,000 registered user mark. For those who don’t know, a free account gives users 3 price searches per day, and for $5/month you can perform unlimited searches and access a few other premium services. 3 searches per day isn’t much - more of a trial than anything you could routinely use if you’re a collector. Truth be told, we only want people using the site that are willing to pay the $5/month.

To date (since May) there have been ~200,000 price searches performed, mostly by Premium Account holders. So why wouldn’t we open the whole thing up and make it free for everyone? We might be approaching 2 million price searches right now, and with that we could sell a lot of advertising. A lot of people think that way (at times I have), but there are a few fundamental flaws with that thinking:

  1. It’s not that easy to sell the advertising. Ad networks are OK, but if you want to make more than a few dollars CPM (cost per thousand impressions) you’ll need to sell ads directly. I’ve negotiated quite a bit for SportsLizard with the “best” companies in our industry - many of which have contacted us - and it’s REALLY hard to get that from them. They want cheap ads ($1-$2 CPM) because some other stupid site owner will offer it to them. Never mind that the other site is plastered with ads and the quality of visitor is low and won’t convert to sales for them - they don’t care/aren’t smart enough to draw that conclusion. They just want to buy cheap ads. Which leaves you with two options: cover your site with a crazy amount of ads or stick with ad networks (AdSense, YPN, Value Click, Commission Junction) and earn a few bucks CPM. Think about that - for every THOUSAND impressions of your ads you’re only making $1-$3. That takes a crapload of scaling to become profitable.
  2. If you DO scale that to profitability you’ll be massive enough to start dictating higher rates from people - maybe as much as $10 CPM. But scaling to that size means you’ll need millions and millions of visitors each month. And that means you’ll need multiple servers and a larger customer service staff and more programmers…all so you can make money selling ads. That probably requires venture capital or angel investing to scale the company, and you still aren’t guaranteed anything. Getting that kind of traffic is tough.
  3. The goal of your site becomes to get people to click away to another site! To keep your advertisers happy, you’ll need to show a high CTR (click through rate) and, if they have a good analytics program, show them that those customers are profitable for them. I don’t ever want to run a site where I encourage people to leave. This is where online ads differ from newspapers and magazines. If you go to your computer and type in the URL you see in a magazine ad, you still have the physical copy in your hand. You’ll probably keep reading at some point. The content still matters. On a website that baits people into clicking, good content can be a hindrance.

Or we could just charge $5/month/user :) It doesn’t drain our single server. It doesn’t overwhelm us with customer service issues. At 1,000 paying users, which we should reach by the end of the year, we’ll be making $5k/month in recurring revenue. To make that in ad revenue - assuming you get $5 CPM…which is tough - you’d need to generate 1 MILLION ad impressions each month, not to mention handle all sorts of scaling issues.

Something to consider when you decide to start the next big thing. At Pure Adapt, we’ll certainly take our “home run swings” with cool projects that *could* make a lot of money if they blew up, but our core projects are always going to be focused around things that can generate money immediately without extreme scaling and dependence on advertising revenue.

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