E-Media Strategist: 9 Tips for Optimizing Your Online Ad Pricing
Many factors can limit a media company's opportunity for online revenue growth, such as content strategy, audience development strategy, website/e-newsletter design, technical issues, and even your sales philosophy. But almost without fail, I find the No. 1 problem is under- or over-pricing online ad positions. The good news is that optimizing your ad pricing is the least expensive and easiest factor to change to quickly impact revenue growth.
You probably already have established pricing for print, Web and e-mail newsletter advertising, likely based upon your assessment of demand, the competitive landscape and each perceived ad-position's value. The first step to right-sizing your ad rates is to see if you are properly priced among your own channels. There is no better way to do this than to look at the effective CPMs of each. Let's look at a typical business-to-business media property. (See the top set of charts below.)
Many publications still have print as their baseline, so we'll start there. First, note that we really have no idea what the "open rate" of a print magazine is. Despite our reader surveys, it's very unlikely that 100 percent of the magazines we ship are actually opened and read. And of the people who open the magazine, we cannot say that 100 percent of them actually see every ad. Let's give print a generous assumption that 75 percent of the people who receive the magazine see a given ad (15,000 impressions per ad). With an ad rate of $1,500, the effective CPM is thus $100. E-mail newsletters also have a circulation, but unlike print, we can track how many people actually open it. Typical newsletters have a 15-percent open rate, but since open rate is known to be slightly under-reported, let's adjust that to 20-percent. (Open rates on e-mails are calculated based on the delivery of a tracking pixel within the e-mail. If an e-mail client does not display images, or if the e-mail client blocks images—which happens quite often—then the tracking pixel does not load, and the sender never knows that the person opened the e-mail. Thus, open rate is under-reported, but nobody knows by how much because it cannot be tracked.)
Now, here's the tough part to swallow: An advertiser doesn't care how many people you sent the e-mail to. They care about how many people actually see their ad. In this case, with a circ base of 25,000, 5,000 people opened the e-mail and saw the ad. Let's assume the advertiser purchased the large, primary ad position in the newsletter. With an ad rate of $1,500, the effective CPM is $300—three times that of print. Something's wrong.
For websites, most publishers like to tout their overall Web metrics like unique visitors and page views per month. Guess what? Your total website traffic doesn't matter. Most publishers rotate multiple advertisers in the same position, so what matters is how many times each ad is seen (i.e., impressions). Let's assume the website has 90,000 page views per month and that we rotate three advertisers in the top leaderboard position, giving each 30,000 impressions per month. The rate is $1,500, which results in an effective CPM of $50—half that of print and 1/6 that of e-mail. Again, something's wrong.
An Optimal Pricing Strategy
Now let's take a look at how we might better optimize the pricing across media. (See the bottom set of charts on page 13.)
To achieve comparable CPM on e-mail newsletters, we would drop the ad rate to $500. Again, remember that you're really only reaching 5,000 people with the ad, so this is a reasonable rate.
For Web, we would take a different approach. If we were to achieve a comparable CPM for 30,000 impressions, our ad rate would have doubled to $3,000. That probably would scare off advertisers because it sounds so high. Instead, to achieve a comparable CPM, we can halve the number of impressions per advertiser, but this also means we can now sell twice as many people into this position each month.
Of course, the big assumption we're making here is that the relative value of print, e-mail and Web ads are all the same. Most publishers will argue that a print ad has more value than Web or e-mail; but really sit back and think about it. Some compelling arguments can be made about the value of Web and e-mail advertising such as concrete impression and click tracking, share-of-voice, etc. But if you don't agree with this assumption, adjust accordingly by aiming for different effective CPMs. The point remains the same: Evaluate your pricing rather than guessing.
The final rule of thumb I use when evaluating Web and e-mail pricing is simple supply and demand. I always shoot for 80-percent sell-through on a given position. If I'm significantly below that mark, then the position is over-priced or isn't getting enough sales attention (that's an entirely different article). Conversely, it may be nice if you continually sell out an ad position months in advance, but you're most likely underpriced and leaving money on the table.
These principles work not only for Web and e-mail ads, but for sponsorships, lead-generation and more. Granted, this is a simplified look at how to price your online advertising. Other intangibles exist, such as the competitive landscape, market cycles, market sensitivity to price thresholds and more. But hopefully you now have some additional tools to help you evaluate your ad pricing and maximize your online revenue potential. PE
Eric Shanfelt specializes in practical revenue-generating strategies for publishers. Read his blog at eMediaStrategist.com where he often responds to comments via his BlackBerry or iPod.
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