Dear Lost:
Oh dear! This is such a hot topic for books, magazines, newspapers, television, online discussions, and so on. You certainly did not pick a narrow or offbeat topic. While the topic is broad and volumes can be written on it, we will attempt to outline a brief introduction to the subject.
We wish not to discuss how iMahal manages its advertisers and advertising. Also note that the names of companies mentioned here are strictly for illustrative purposes, and such mention does not constitute an endorsement, explicit or implied, of iMahal, in any way, shape or form. With this disclaimer in mind, let us turn to the topic at hand.
Advertising on the web is a rapidly evolving area. You just have to look at the income statements of such companies as AOL, Yahoo! etc. to realize that advertising is an attractive source of revenue for websites. Large companies like AOL and Yahoo! can afford to have their own salesforce for selling ad space. Small companies, and particularly startups, can not afford such an expensive cash outflow while focusing on gaining a footing in the marketplace. This is obviously a problem for small companies, and perhaps even medium size companies.
As we know, whenever there is a need, there are clever people who would target the market opportunity and solve the problem to make money, and this area of advertising is no different. "Intermediaries" such as DoubleClick, Flycast, Engage, etc. have emerged to bridge the gap between the advertisers and web businesses. These intermediaries employ a salesforce to "buy" the ad inventory from advertisers on the one hand, and employ a salesforce to "sell" the ad inventory to web businesses on the other. In the process, they get a cut of the ad revenue. Their commission varies, but 25-40% is typical. The ad revenue itself varies based on the advertiser's ability to target specific customer segments on a particular website. Advertisers pay anywhere from $5 per CPM for little to no targeting, to upwards of $40 per CPM for precision targeting of lucrative customer segments. By the way, CPM stands for count per thousand (M is the accounting lingo for thousand), and is equivalent to one thousand impressions (or "viewings").
To illustrate this, let us take an example. Assume that the intermediary contracts with an advertiser for $5 per CPM to deliver non-precision targeting. In other words, the advertiser wants to "display" the ad to a not-particularly-targeted customer segment and will pay $5 per 1,000 impressions (or pages served with advertiser's ad, assuming one ad per page). Now the intermediary has to sell these ads and have them displayed on websites with matching criteria, agreed upon with the advertiser. Assume now that you make arrangements with the intermediary to display those ads, for a revenue spilt of 60-40 in your favor. When you display those ads on your site for 1,000 impressions, you can collect $3 from the intermediary. In the process, the intermediary makes $2.
Intermediaries buy ad inventories from many advertisers, with stipulated targeting conditions, and sell them to many websites who in aggregate meet the stipulated targeting conditions of the advertisers. Clever arrangement, isn't it? Well, it works out well for all parties involved. Advertisers do not have to negotiate with millions of websites, and websites do not have to expend resources on sales people to sell ad space. The intermediary comes to the rescue, and gets a cut of the action.
The arrangement described above is the most typical of banner advertising-the rectangular ads your see at the top of a webpage. There are also "affiliate" programs. Generally, you can sign up for these programs on the web and do not have to negotiate anything with anyone. Effectively, you agree to all stipulated conditions and arrangements stated right there on the web about advertisers. The payment may be based on impressions, click-throughs (when a user on your site clicks on the ad to go to the advertiser's site), transactions (when a your from your site clicks on an ad to go to the advertiser's site and conducts a transaction). The arrangement is typically characterized as per CPM rate, or per click-through, or percent or number of transactions.
These are the most common practices in web advertising. Multitudes of variations on these practices are also in use today. But that is the topic of discussion for another book or books.
Keep us posted with your progress on the new venture.
Dear Mentor:
