The average CPM of all internet page views can be calculated as the total $ amount spent in online advertising divided by the total number of page views.
Please note that CPM in this case also refers to the effective CPM of CPC and CPA ads, and doesn't refer only to ads sold on CPM pricing.
If it can be shown that the denominator (# page views) will grow faster than the numerator ($s spent online), then it must follow that the average CPMs on the internet will come down.
Many sources track the numerator: in the United States, online ad sped is growing at about 18% according to this IAB release.
But calculating the growth in page views proved trickier. Instead let me calculate a proxy which's aggregate time spent online, i.e., time spent online per user times the number of online users. Time spent online per user is growing about 25% YOY according to this ITFACTS.biz article quoting Compete; in addition to this, the number of users has also grown - while I couldn't find latest data, a Pew report showed that the % Americans online had grown by 14 million people between 2005 to 2006, which's approximately 7% of the poulation. Putting the 2 together roughly adds up to about 32%.
Clearly, growth in time spent may not linearly translate into growth in page views, especially due to the growth of videos which can consume substantial time in 1 page view. However, the effect of videos is easy to strip out by looking at this Nielsen report: if you do the math, it's clear that video views account for only 8.7% of all time spent online. Even if 100% of that has been added in the last couple of years, we have a net growth in non-video time spent of about 24%, and this number is likely higher.
Putting all this together, we can conclude with reasonable certainty that PVs online are growing faster than online ad $s.
Which means that average CPMs are dropping. From there it would take a couple of small leaps of faith to conclude that 1) this is a long term trend (after all the sum total of ad dollar growth, online+offline, is finally indexed to GDP growth; whereas PV growth can be much more elastic) 2) this would effect not only the newcomers but also the incumbents.
How does one react to dropping CPMs? What can you do if you're an online service whose primary revenue stream is online ads.
Well, firstly, don't panic. The costs of running an online service are dropping dramatically too, and that helps all companies maintain their spreads. New companies always recognize these dynamics very well, but the incumbents in any industry have the tendency to be fat cats. The cost per page view served should become an important metric for all internet CEOs. Hardware cost is certainly one component of this cost and it tends to be easy to manage; what's harder usually are the people costs where companies must innovate to leverage small teams of employees who don't scale linearly in size with the growth in website traffic.
Secondly, all the dynamics I mentioned in terms of the increase in PVs on the internet can work to your benefit. If you manage to grow your page views to match or beat the rate of growth on the internet as a whole, you'll likely do well. Especially if you keep your cost of serving additional page views down and maintain your spreads. You must set very aggressive goals for page view growth.
Thirdly, this has implications for how you do detemine your marketing costs. Marketing costs must come down on a CPM basis, and companies must move to ever more efficient marketing channels, and perform ROI analyses of all their channels.
Finally, these trends also have implications on how you manage your ad sales force. Clearly, your sales team needs to understand these dynamics and accordingly seek to optimize the tradeoffs between sell throughs and CPMs. In addition to this, companies relying on online ads for revenues must also consider low cost self serve models.
In all of these, there are opportunities for intermediaries and aggregators (e.g., for consolidating self serve banner and widget ads across many publishers, or for providers of cloud computing who're helping drive hardware costs down).
I would love to hear from anyone who's seeing this trend play out as I mentioned, or any other way. I do recognize that I am forming conclusions based on data patched from multiple sources, but it seems right to me:)
VERY informative.
I believe traffic is increasing on the net at a fast rate. And yes it is most likely decreasing the average cost of ads due to the sheer volume of page views.
I have noticed a trend where some of the bigger sites are taking control of their ad space so they can make a bigger profit and control the price. These bigger sites are relying less and less on ad serving companies.
Posted by: banner advertising | December 16, 2008 at 11:49 AM