For Publishers With Paid Products, Now Could Be a Good Time to Spend
After last week’s analysis of companies making a bigger push to revenue sources that are closer to the consumer’s transaction, I started thinking about this in more detail.
With ad rates dropping, I wondered… While this is absolutely a liability for many publishers, I couldn’t help but feel that there was also some opportunity buried in the numbers.
Then I saw this ad show up in my Twitter feed.
What if there is an opportunity to start spending money on advertising to bring users to your paid products? If ad rates are down, that means any dollar you do spend will go farther than it would have back in February. This isn’t a strategy for those that depend on advertising or even commerce for revenue, but for those publishers that have a paid product, there might be an opportunity to accelerate growth in that stickier and more predictable revenue stream.
Let’s start at the beginning with some known knowns.
Ad rates have dropped
It should come as no surprise, but if publishers are seeing ad rates weaken, it’s likely that Google and Facebook are also seeing the same drop.
Barry Diller, chairman and senior executive of Expedia Group, told CNBC that they were slashing ad rates sharply. He said:
At Expedia, for instance, we spend $5 billion a year on advertising. We won’t spend $1 billion on advertising probably this year. You just rip that across everything.
He’s an extreme example since there’s no point to advertise a travel platform when no one is considering going on vacation or business trips. Nevertheless, $4 billion in lost ad spend is still something and if we extrapolate that across multiple brands across various industries, you’re talking about tens of billions that will likely not be spent.
According to a Digiday story:
Sources at two different publishers said YouTube CPMs had fallen more than 20% from highs recorded earlier in 2020, and they were bracing for the possibility that declines could deepen as the year wears on.
A source at a third publisher said that while CPMs had dropped, low ad fill rates on their coronavirus content presented a bigger problem. “The fill rate is nowhere near what it could be,” said that source, who refused to share a specific ad fill rate for their coronavirus videos. “We’re creating inventory faster than they can fill it.”
That means this following graph should come as no surprise.
This data comes from WITHIN, which is a performance brand marketer for ecommerce companies. Nevertheless, if CPMs are dropping as much as they are on Facebook for ecommerce companies, there are impacts for publishers as we take this discussion to its completion.
[If you want to dive deeper into this, Nathan and Adam over at Divinations have a piece that brings additional insights worth looking at. This is normally a paid piece, but you have a secret link to read it. Just click here.]
Subscriptions showing signs of growth
At the same time as ad rates are coming down, all evidence points to subscriptions being up. I’ve written about this more than once over the past couple weeks, so I’ll summarize this by pulling a few key points.
First, at the end of March, we saw a big spike in subscriptions for streaming platforms. Again, not directly related to media, but it’s indicative of a change in user behavior as people are spending more time at home.
Here’s the data again:
I wrote last week:
The Atlantic added 36,000 new subscribers in March. Bloomberg told Digiday that it is seeing 3x the subscriptions than it normally does. I would wager that many publishers are seeing this increase in subscriptions because they are promoting them more aggressively than they have in the past.
This makes sense. Historically, publishers have been almost ashamed to ask for money. However, over the past few years, we’ve seen these same publishers get more comfortable doing so. It’s paying off for them.
If you’ve been reading my newsletter for the past few weeks, none of this surprises you. However, here’s where I think it starts to get really interesting.
Ad Rates Down+ Subscriptions Rates Up = Growth
As publishers, we spend a lot of time thinking about ourselves as ad sellers. This is normal. It’s a core business model for most publishers and, therefore, calling us a seller is acceptable.
However, as publishers start moving deeper into building paid products of sorts, we have to think about ourselves as more than just ad sellers. It’s important to also think about ourselves as ad buyers.
If ad rates are down, that means that we are suddenly able to gain access to audience for cheaper than we normally would. And that’s opportunity.
Yet, it’s not opportunity for every publisher because it requires you to know your funnel before you started spending. With cash flow tighter than, you need to make sure that when you’re spending, you’re going to earn your money back.
I know a media entrepreneur who has this mystical spreadsheet. He’s spent a lot of time working on it and he’s gotten it to the point that he knows exactly when he’ll break even on his ad buys. While you don’t need to be this specific, it’s important that you know a few things.
Here’s how you can get started…
The first thing you want to do is identify exactly what your Customer Lifetime Value is. You’d be surprised how few publishers know this, but it’s a core number that you must calculate. Once you know this, you can start working backwards.
There are a variety of ways to do it, but let’s try and simplify it for right now just to get started.
You need three numbers:
- Average Revenue Per User (ARPU)
- Gross Margin %
- Customer Churn Rate
For the rest of this section, I will use hypothetical numbers as defined below:
Gross Margin: 50%
Customer Churn Rate: 3%
That means you earn $10 per month with $5 in margin and lose 3% of your subscribers each month. With this information, we can get the LTV with the following formula:
LTV = (ARPU * Gross Margin %) / Customer Churn rate
LTV = ($10 * 50%) / (3%) = $166.67
This is a basic formula and doesn’t take into consideration things like non-linear churn, group subscriptions, etc.
David Skok has an amazing piece here that is worth looking at to really dig into LTV. This piece talks about SaaS companies, but since we’re both chasing subscription dollars, it has many parallels. I’ll use one example of his below, but then I would encourage you to check out what he writes.
Let’s say that we have two different subscribers: one that pays full price ($5) and one that pays a trial amount ($1). This means we have $6 in total revenue. What happens if the trial cancels after a month? Now we’re left with only $5 in revenue. However, a couple things happen:
- Your customer churn is 50%
- Your dollar churn is only 17%
This is obviously problematic and we do need to be careful when calculating this.
Nevertheless, the basic formula starts to give you an idea on how much a user is worth to you and that’s a step in the right direction.
Applying this to ad buying
Now that you know how much you can bid to get a customer to break even, let’s look at how you can actually deploy this into your business. To make the math easy for me, I am going to say that we have a $200 LTV.
Step 1: Identify highest converting pages
You want to know where on your site a user is most likely to convert. In the above screenshot of Jessica Lessin’s tweet, it’s likely that they’re finding a lot of people converting against that story.
If you don’t have conversion tracking set up on your site, that has to come first. You want to know what stories or pages are giving you the most new sign ups to your paid product.
Let’s assume it is a deeply investigated story and you find that 1% of users that hit that page convert.
Step 2: Determine how much you want to earn
In the LTV formula, we factor gross margin, but that means that the maximum you can spend is $200 to still break even. You’re in the business of earning money, so let’s assume we want to earn $100 of the $200 LTV.
That means you’ve got $100 that you can spend on attracting users to the highest converting pages on your site.
Step 3: Start buying ads
At this point, you’re looking at pretty basic math. If the average conversion on that story is 1% and you have $100 to spend on ads, that means you need to drive 100 people to the page. That means you can only spend $1 per click.
There are a few things you can do to try and improve your chances of success.
First, can you get to a 2% conversion rate on your page? That suddenly increases how much you can spend on a click quite significantly. That gives you more room to experiment to find channels that actually work.
Second, what if you target users that are more likely to convert based on how many pieces of content they’ve already consumed on your site? If you use a metered paywall, find all the people that are only one article away from hitting the paywall and target them.
Don’t forget retention
Before I wrap this up, I want to talk about one other thing that publishers might be forgetting, especially as they look at their budgets.
The reason we calculate LTV and pay close attention to our churn rate is because it is far cheaper to keep a customer than it is to find a new one. In the above example, we’re willing to spend $100 to get a new customer. It should be much cheaper to keep one of your current subscribers.
If you have to pick between investing in keeping your current subscribers or investing in getting new ones, focus your efforts on doing targeted ad campaigns toward paying subscribers who haven’t read an article in a little while. Reducing your % churn can have a huge impact on your business.
Original Formula: ($10 ARPU * 50% Margin) / 3% Churn = $166.67 LTV
New Formula with 2% Churn( $10 ARPU * 50% Margin) / 2% Churn = $250 LTV
It’s a subtle difference, but if you can keep more of your customers engaged, you’ll have more revenue than you would just getting new subscribers. Even spending $50 per user to keep them engaged still leaves you with more revenue than if churn stayed at the original 3%.
Let me wrap this up with the following: every business has to assess their cash flow and understand where they are.
If it takes one year to break even, can you withstand the drop in cash for the slow monthly revenue? After the year mark, you’ll be earning profit, but between now and then, you’re still talking about making an investment.
So, while I think this is a good time for publishers with a well defined paid product to experiment with being a buyer of ads, each operator needs to do the exercise to understand their burn rate and determine just how much they can afford.
If it’s nothing, there’s nothing wrong with that. As I said a few weeks ago, survival is all that matters. Opportunistic growth is less important than staying alive.