Banner Economics

Business online, like business offline, always boils down to math: the difference between cost and revenue. If your banner campaign is costing more than it’s earning, you won’t be in business for very long. To figure out how your campaign is doing, you’re going to need to know your CPM, your Click Through Rate and your Conversion Rate. These are your basic tools. If you don’t know them, find out! Let’s say your CPM is $20, your CTR is 1%, and your Conversion Rate is 4%. (So you’re paying $20 every 1,000 times your banner is shown, it brings you 10 new visitors, and you make one sale for every 25 visitors the ad brings). The question you need to ask yourself is how much are you wasting on the 24 users who don’t buy.

Cost per visitor = $20 / 10 = $2 So each visitor costs you $2, but you need 25 visitors to make one sale, so...

Cost per sale = $2 * 25 = $50 ...if your product is worth less than $50, you’re losing money.

That’s pretty simple, and as you can see, there’s not a lot of room to maneuver here. Margins are tight on banner advertising, and that applies to both the site selling the advertising space and the webmaster buying it.

Of course, hard cash isn’t the only way to measure the success of a banner ad, and one reason they’re still popular is that they’re a pretty effective branding tool. After all, advertisers spend millions on billboards without expecting motorists to drive straight through them and make a purchase! On the Internet, those advertisers can even be reasonably sure that the people who see their ads will be interested in them. But branding costs money — lots of it — with no guarantee of results. It’s usually best left to the big boys.

The banner ads on my sites usually send users to my affiliate partners, and the banner ads I place on other people’s sites usually come from my affiliate programs. They don’t cost me anything and as long I’m making the sales to pay my affiliate partners, everybody’s happy.

If you do decide to purchase banner advertisements though, and if you have a very specific market in mind, make sure they are strategically placed on sites where the traffic will most definitely be interested in your product or service. Find a site that suits exactly your specific product and you’re going to be appealing directly to your target market.