Lies, Damned Lies and Rate cards
As you develop your own business model, it is important to understand the successful and unsuccessful business models that others have tried. Sure, another company’s success isn’t an indicator of yours (the same is true of their failure), but it is important to apply what others have learned to your own business (which is exactly how Google developed Adwords).
There are many techniques to learn about other businesses, but the one that seems to always yield false conclusions begins with rate card analysis. The oversimplified version takes the CPM rates listed in the rate card and multiplies them by the pageviews of the site. Rate card analysis isn’t limited to websites - it is used to look at many different forms of advertising based businesses.
This is analysis is fundamentally flawed on multiple levels:
- Advertisers rarely pay rate card. This is well established.
- Excess inventory. Advertising inventory rarely sells out. Did anyone else notice how many house ads there were during the Super Bowl?
- Revenue has little to do with cost and profitability.
Bambi Francisco’s piece on Daily Candy claims that Daily Candy gets $280 CPMs for emails. Bambi also provides topline revenue and margin numbers for 2006. However, first lets use DC’s ratecard to estimate their 2006 revenue.
Adage had a good article on Daily Candy’s business back in March of 2006. Daily Candy charges $280 CPMs for dedicated emails and between $30 and $100 for advertising on their daily emails. They also claim 1.2M daily subscribers. Assuming a fixed 1.2M subscribers, an average CPM of $65, and a dedicated email every 2 weeks, we would estimate 2006 revenues of $37M. A high estimate would put revenue at $61M. If you had just taken the $280 CPM from Bambi’s article, you’d find an estimate of $123M
In reality, Bambi reports Daily Candy’s revenue at a very healthy $16M for 2006 with 60% margins. A great business, but not nearly the revenue machine its rate card would suggest.
Rate cards are most useful informing how the business thinks about itself. They rarely reveal the true economics of a business.
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Of course the Super Bowl ads don’t sell out. You know how many millions of dollars it costs for a 30 second spot? Not to mention production costs, and if you made a good investment, then you’re probably competing for eyeballs with some of the most creative advertising that has ever been produced.
If not, you’ve just spent millions of dollars spinning your wheels.