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How to model an Advertising business

How to model an advertising-supported business, using the Standard Financial Model.

Direct advertising

On the Get Started - Revenue Model on the Standard Financial Model, there is an optional section which aids users looking to model an advertising-supported business. This section aids with setting the revenues for the inputs, but does not directly link into the inputs. The sequence of calculations calculate the average usage and the monetization of that usage to calculate the Average Revenue per User/Customer/etc. (ARPU), which can then be used as the revenue input for the conversion step that you are using to model your advertising revenue stream.

The inputs are:

  • Unique visits per month, per User/Customer/etc.
  • Pageviews per unique visit, per User/Customer/etc.
  • % of Pageviews with advertisements
  • Number of advertisements per page
  • Sellthrough %, meaning the % of the impressions that are sold
  • % of Ads sold as CPC (Cost per Click), which is used with the % of Ads sold as CPM (Cost per thousand impressions) to help you analyze the mix of two different pricing methods
  • CPC
  • Click rate, which is used with CPC to calculate eCPM (effective CPM)
  • CPM
  • Ad server cost CPM

This calculates RPM (revenue per thousand pageviews, an advertising industry metric you can use for benchmarking) and ARPU (which you can use for benchmarking with other advertising-based businesses, and use as the input in the model.

Sponsorships, Partnerships, et. al.

Additionally, you can model sponsorships, partnerships, and other advertising methods that are not explicitly CPM or CPC-based by using the Standard Model’s revenue model to model the aquisition of new sponsorships, then the revenue assumptions to be the average partnership revenues per month. You could choose to set the conversion funnel for one conversion step to reflect users, and the second conversion step to reflect advertisers. In this way, you’re using the inputs to model both the users - the activity that you’re monetizing - and the advertisers - where the revenues are earned, and you can set the acquisition channels to flow to users and advertisers separately.

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