The Myth of Building A Software Business on Google AdSense Revenue

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The Myth of Building A Software Business on Google AdSense Revenue

 

As the saying goes, “Somebody will win millions of dollars in the lottery this month.  Just not you.

 

Similarly, there are many websites and individuals that will make lots of money in Google AdSense ads – just not you.

 

In looking at many of the “Web 2.0” companies that are out there, most of them don’t have a discernible business model (by “business model”, I’m talking about some definable way to charge money and create semi-predictable cash flows).  When pushed, and asked how they’re going to make money, many Web 2.0 company founders will simply revert to the knee-jerk, “we’re really focused on building a user base right now.  We’re not focused on revenues”.  Or worse, the response is sometimes “we’ll make money on advertising”.  Unless the company happens to be really focused on some segment of the market, which specific types of advertisers will be interested in and pay a premium for, this model just doesn’t work.  Systems like Google AdSense which “aggregate” a large volume of advertisers and connect them to a large volume of websites, though highly efficient, won’t work for your software company.

 

Here’s why:

 

  1. Systems like Google AdSense are generally determining which ads to send to your site by using their highly sophisticated algorithms to find just the right ads based on the content of your site.  Problem is, if you’re a software company, most of your content is probably not “public” (i.e. requires users to signon) and as such can’t really be processed by Google.  So, you end up with a bunch of non-relevant ads (which irritate your users and/or don’t generate clicks/revenues anyways).

 

  1. You have no way of knowing/predicting what kind of revenue you’re going to generate.  Google gives you lots of reports and details on click through rates, eCPM (estimated cost for a thousand clicks), and other useful information.  What they won’t tell you is how much the advertisers paid for the ads, and what portion is coming to you.  If Google decides someday to take a larger portion of the pie, you won’t probably know (and won’t be able to contest it anyways).

 

  1. Given that Google is using an auctioning process (which is a good thing), there is essentially a “market” for Google Adwords (what the advertisers use to promote their product/service).  The upside to this is that advertisers have to “compete”.  The downside to this is that like any market, prices can vary.  Advertisers may decide (independently or in collusion) not to “drive prices up” by competing with each other.  Or, the market may just change.  This has a dramatic impact on your revenues.  And you won’t know until it happens.

 

  1. Click fraud (or more importantly, suspected click fraud) is a major, major issue.  If Google suspects that people (or automated bots) are clicking on your ads to inflate your revenues, they can turn you off.  Period.  No warning, no arbitrage, no recourse.  Period.  There’s been a lot of talk about this (I’ve had it happen to me on one of my personal sites).  Google is judge, jury and lead prosecutor.  They don’t have to explain anything to you (and they won’t) and what little chance at “evidence” there was is gone because they will turn off your account immediately so you can’t even see your reports.  You were warned.  [Note To Self:  This entire phenomenon deserves an article into itself].

 

  1. The magnitude of revenues made by even highly successful (highly trafficked) sites seems to be pretty low.  If you’re an independent blogger, writing content for left-handed plumbers that enjoy Broadway musicals, and making $10,000/month on Google Ads – that’s a success.  And trust me, you’re in the 99th percentile.  That’s just not that much money when you have those irritating things called expenses.  If you’re a software company trying to make a living (and pay employees, rent and other things) and generating even $20,000/month in AdSense revenue, you’re still struggling.  The fact that your monthly revenue can drop from $20,000/month to $2,000/month overnight will cause you much loss of sleep.  Somehow, explaining to your team that the price for AdWords like “CRM, industrial, engineers” has dropped by 50% is not going to provide them much consolation when they can’t get a paycheck.

 

Obviously, I’m being a little extreme here (but not that much).  I simply don’t think that 90% of the companies out there that think they are going to build a business on AdSense revenue really know what they’re talking about.  If you really want to learn how all this works (and what kind of money you can expect), I’d suggest you try it.  Setup a website, subscribe to Google AdSense, make a little money and just see what happens.  Heck, you can even extrapolate and say “well, I’ve got 100 users today and am making $100/month…if I had 10,000 users, I could make $10,000 a month!”.  But, just do the math – and be realistic. 

 

Note:  All of this is really looking at advertising revenue through systems like Google AdSense.  If you’re planning on advertising directly with partners and others that place a premium on the reach you have with customers, it’s a different ball game.  You lose the efficiency of Google, but will generally have other benefits (like a fair degree of predictability and control).

 

If you think I’m wrong, and your experience leads you to believe you can build a software business on Google AdSense (or its competitors), let me know.  Would love to hear your success stories – or even your hopes for a success story.  

 

 

 

 

Posted by on Wed, Feb 22, 2006

COMMENTS

It's interesting that competitors keep driving up the cost of AdWords. Game theory tells us that we'd expect the competition in each "word" market to eventually drop the dominant strategy and cooperate. After all, it's an infinite game, so they're only hurting each other in the process. But no, there's always someone else out there that belives "mesothelioma" is worth a hundred dollars and ONE CENT.

Ruben

posted on Wednesday, February 22, 2006 at 1:28 PM by


This post really is a more specific example of your previous one on outsourcing - you're detailing the risks of outsourcing your advertising management function to an aggregator like Google, rather than shaping it yourself.

Put the same question in a different context: what "offline" software firm would blithely outsource its sales function? (that is, without a comprehensive channel strategy)

-Ray

posted on Wednesday, February 22, 2006 at 4:19 PM by


Game theory doesn't predict the price will drop, because cooperation evolves only when:
1.) The game is infinite
2.) The expected payoff if both players cooperate is greater than if both detect.
3.) Players know who the other players are and can remember them for later rounds.
4.) Players know how the other players acted and can remember this in later rounds.

Conditions 1) and 2) are met by the Adwords market, but conditions 3) and 4) are not. You can't really punish people who defect, because you don't know who they are or if they'll be competing in the same game again. So I'd expect this to evolve towards a perfect competition auction, i.e. seller (Google) gets all the surplus.

posted on Wednesday, February 22, 2006 at 8:16 PM by


I fully agree with your post, in general they are too many risks in outsourcing parts of a business. For the advertising part, let me tell you that I know a solution that you might be interested in on the market: ADS-click.com. The company has created platforms that are very similar to Google Adsense and Adwords but are provided on a private label basis, meaning that you manage and control the relationship with advertisers….you create your advertising business…

posted on Monday, March 06, 2006 at 5:49 AM by


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