Secret to Earning MORE from Ad Space – Get Jimvesting's Ad Cost Model FREE!
Author: Jim | Filed under: Investing Tips, Make Money Online, Marketing 101
I think that it is fair game to say that most of you reading this post either own a blog now, or would like to own a blog sometime in the near future. It comes as no surprise that many of us, myself included, like to monetize what we have with some advertisements to get some extra cash in our pockets. The average blogger will earn around $200 a month from private ad sales. But no matter how you decide to monetize your blog, it’s important to understand how pricing SHOULD work, so you can maximize your profits!
The most typical forms of blog monetization are through text ads and banner ads, both of which can be located pretty much anywhere on your website. Regardless of the format, what I am going to be talking about will apply as long as you offer your ads paid on some kind of periodic system. For example, maybe you charge your advertisers every month to put a banner up on your site; maybe you instead go by the week, or even semi-annually. Whatever the case, chances are that an ad today, is worth less than an ad tomorrow if you are running a successful blog. This is what we call in economics the “time value of money.”
The Time Value Of Money: So why is a dollar today worth less than a dollar tomorrow? Holding inflation aside, which will naturally cause the value of money to appreciate over time, we assume that you could always invest anything that you own today and make more money into the future! The less time you have to invest, the less money you will have in the long run.
So what am I going to talk to you about today? I’m going to talk about properly valuing your ad real estate using compounding interest rates. This is an important lesson, as you could be losing hundreds of dollars if you don’t keep this in mind when you negotiate.
Don’t Rip Yourself Off!
Just a few days ago I received an order for a text link ad, only the advertiser wanted to buy a text link for an entire year… that’s 12 months worth! While this was great news, ordinarily I would have just asked him to pay for one month at a time. Not wanting to lose such a massive sale, I decided to use a compounded interest chart to map out what the fair cost would be.
A typical blog owner would say that if my current rate per month is $20.00, then 12 months would be $20.00 x 12, or $240. This sounds fair, right? WRONG! If this was your answer, you need to seriously rethink the way you do business. Assuming that 
you are running a decent blog, your rates will go up over time, correct? Therefore, we need to adjust for this when we work the rates into a 12 month period.
What I have done is create a compounded rate excel file that will take a starting rate (e.g. $20.00) and adjust it up x% for each month, depending on how quickly you predict you will develop your website and increase the value of the advertisement. A small note, this is not the same as adding 60% for 12 months of 5% growth… this is wrong. The way that this works is that we would start at our base price, $20.00, then add 5% for the second month, or a new cost of $21.00. After that, it is a third month at the second month cost plus 5%, or $22.05. This process continues all the way to the 12th month, when each ad spot would cost $34.21 adjusting for that 5% growth we expect.
Think it doesn’t make much of a difference? Think again!
If you had used simple straight-line growth at a constant rate, you would have billed a total of $240 for the ads. However, if you used a 5% growth per month, you would have billed a total of $318.34… that’s a difference of $78.34! This is revenue that you are just giving away if you are going to give an advertiser the same rate into the future.
Jimvesting’s Advertising Cost Model – A FREE Gift to You!
I have developed in Microsoft excel a model that will take two inputs, a base ad price and a rate (specified by you), and generate a 12-month pricing plan… showing you the difference between constant rates and compounded rates. It’s very easy to use, but if you need some help, follow along in the video so that you can see just how to use this powerful model.
DOWNLOAD THE NET FOOL’S ADVERTISING COST MODEL
Remember, you can really use any growth rate that you want, and my 5% is only a sample. Suppose you are a newer blog and you are going to grow tremendously in the first few months… maybe you would like a rate closer to 20% growth? Or suppose you are an old timer who doesn’t increase traffic as much as you should… perhaps you use 2.5% growth? My model can pump out valuations 12 periods into advance, and you can look anywhere in the middle and pick out, let’s say, 8-months of payment if you’d like.
Bottom Line: If you are going to sell ad space to your users, you better make sure that you aren’t ripping yourself off! If somebody asks if they can pay for a year of service… don’t tell them “no!”, tell them that you need to account for 5% growth and show them my model in work… they should easily agree to the terms. Heck, it works for me! 
- Jimvesting
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I remember giving away ad spots on bloggin-ads when I first started, lol. After that, prices went from $5 to $10, then all the way up to $40/month per 125×125 spot.
-Mike
Nice post. Thank you.
i would have to agree because it sure seems like a very worthy advice
very useful stuff there; good for the people not versed in ‘business’ …just a small note
sorry the last bit was meant to say the following…got the quote tags messed up:
shouldn’t it be depreciate as it will lose value? i’m thinking in context of deprecation values in blancesheets / profit-costs etc
Twitter: @jimvesting
December 29, 2008 at 4:19 pm #
You got it Donace! Good to see someone has an understanding of economics… I accidentally slipped in a “your” there, where I meant to just say that the value of money will appreciate over time. Thanks!
But does not that mean that people giving you business in advance should get rewarded too. In real life, when someone orders for 1 year business, companies offer them bulk order discounts due to the assurance of business. That fundamental is universal and should be true for most of the businesses.
Again, assuming your blog quality might deter or the value goes down, would you reduce the prices on your own? How many of them really do it?
Questions in my mind after reading this post. Increasing the price should be the way, but whats your opinion on my points above.
Awesome!
This will help me out especially since i’m still working towards this for my blog!
This is interesting. Definitely something I will have to look into.
This is perfect timing, I was considering selling ad space and had no clue on where to begin, this really helps Jim!
ffs, $20/month is $20/month. The charge is $240. You’re thinking of investing the money at 5% interest. Now let’s assume you get 5% interest, then your math is right you’ll earn $300 something dollars. Now if the guy pays $240 lump sum, you instantly have $240 to invest at 5%, work out the ROI on that. If he pays you on a monthly basis then it still comes out as before anyway. If he pays you after 12 months then you’re an asshat.
I misread initially, but I still think something is fucking screwy when you’re charging for supposed future value. Include it in your base rate.
Twitter: @jimvesting
December 29, 2008 at 6:45 pm #
I think you are totally misinterpreting this…
If someone buys ads from you for an entire year, why would you want to give them your current rate all the way into the future? Clearly, if you are running a successful blog, then you will be raising your rates over time. My model accounts for this, and you get everything up front from a projection model. No tricks needed
great point there Jim it does make sense they just don’t realize it
Hmmm.. That is a good idea.. I have been applying it online but it depends on the community and condition of the economy.
I will offer free ads on my blog for now. Thanks for the idea Mike.
Nice calculations and very correctly said…
Thanks for the free xls.
Jim,
You are truly a numbers guy, aren’t you!
I have always thought about this, but what scares me, is the fact that, “what if the buyer says no”. Thanks for the xls, will definetly put it to work
Thanks NetFool
Is it always interesting to see someone with a financial background point out to people how they can make more for themselves and the controversy it causes. Nice food for thought.
Whilst your rule is great in theory there is one thing you have to remember, the advertiser may have been thrilled with a $240/year ad cost but not so thrilled with your end result of $318. There is every chance that he would look elsewhere for a better deal resulting in the loss of that particular ad space, and all for $78.
Haha. I guess those college courses are paying off, huh?
Maybe I should put my degree to work and map out some models to improve my bottom line.
Interesting idea…and a great way to maximize your revenue. Just have to be sure your blog’s growth justifies the increased price.
This is a great post – published at a terrible time.
The economy sucks, and the advertising models on the internet are getting crushed. You should of waited 6-12 months to publish this post.. Then everyone could apply it to their blog.
Very few people are buying advertisements on blogs –
Hey thank you very much for sharing your secrets with us.
well its pretty insightful info on what jim currently does business but everyone else does do it differently
I agree abut money worth less over time, but I guess advertisers wants to pay less per month if they buy ad space in advance for several months.
$$$$$$$ This is dollar and it is important for life style but how it can come, simple answer that you done more work and get more money. Blog is way of make money to online.
Thanks for this! Great information..Btw, I’m having a hard time computing how much should I charge for advertising (text link). Any tools for this? Thanks
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Thanks for this great information. It’s another tool and tip that can be used to monetise blogs.
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