This post is run with permission and originally appears here.
As I pointed out in my previous post, advertisers don’t buy page views they buy audience. A publisher’s business model has to produce and monetize an audience. So what kind of audience is profitable? A loyal one. Here is the proof…
The Revenue Model
Because audience engagement is the unit of monetization and because each member engages differently, the revenue contribution and profitability of each audience member varies. For example, assume a fly-by audience member generates on average three page views. With a $30 RPM, each fly-by is worth $0.09 in revenue. Now compare that to a loyal fan generating 100 page views a month or $3 of revenue per month (i.e., $36 per year).
The revenue model can be plotted as shown in the figure above. Charting audience versus their revenue contribution illustrates the revenue model for a publisher. On the left, highly engaged fans contribute good revenue and on the right, each fly-by generates a small incremental amount of revenue.
The Cost Model
Aside from advertising sales, the two primary costs in digital media are associated with producing audience members namely audience development and editorial. Since a target audience is finite, acquiring new audience members becomes increasingly expensive as the size of the audience grows, due to the decreasing number of potential audience members remaining. Additionally, as the audience grows so does diversity and the need for a broader range of content at a larger editorial cost. The increasing cost to acquire and engage the audience is represented along with the revenue model in the following chart.
The Profit Model
Of course profits are made when the cost model is below the revenue model. For the fly-by to be profitable, the cost to produce the content and acquire the page views of the fly-by needs to be below $0.09. Acquiring an audience of 30M fly-bys per month would only generate $2.7M in revenue per month or a little more than $32M per year but the costs of that are likely to be much higher (e.g., Demand Media cost model).
By contrast, the cost to produce the content and acquire the page views of the loyal fan needs to be less than $3 per month to be profitable. Research by Scout Analytics shows the importance of a loyal audience to profitability in a revenue model. A loyal audience is made up of all visitors minus the fly-bys and usually constitutes about 20 percent of the unique visitors but are responsible for about 80 percent of all page views. This means that 80 percent of the revenue capacity (i.e., ad inventory) comes from a loyal audience while about 20 percent come from fly-by visitors. So even though fly-bys make up the vast majority of unique visitors, their revenue contribution is astonishingly low. In other words, generating revenue from fly-bys is the same as chasing page views, but building loyal audience is building a business model.