The Economics Behind Selling Blog Advertising

Economics Behind Selling Blog Advertising

It seems like most sites these days are cashing in on their traffic, their subscribers and in rapidly decreasing droves, their pagerank. These sites are utilizing their best spaces on their site to link out to other certain websites for a premium and mostly for a recurring monthly fee.

Bloggers have been the most recent group of people who have begun to monetize their site heavily through the use of ad networks, CPC programs, affiliate marketing, direct linking, and the ever-sweet private advertising. It is the latter which is becoming a hit with the bigger sites, who have the readership and traffic base to sell their own ad slots, instead of through a network which may take a hefty chunk of your money.

However, when was the last time you actually thought about the process going on behind the scenes of this advertising? How is someone able to sell an image advert for such a high price? How is that other blogger making a profit on those ridiculously low-priced text links? I’m here to help and I’m armed with economic theory (the explanation behind advertising) which you may already know or which you may have inferred through common sense.

Below is a demand and supply graph, pretty much the bread and butter of all economic analysis:

Demand Supply Graph

Whilst it may seem confusing at first, it’s actually pretty simple.

The Demand Curve is sloped from top left to bottom right. An explanation of it would be that if the price of a certain good or service is high, the quantity of the good demanded by the consumer will be low, as the consumer will not be willing to pay such a high price. As the price decreases, the affordability of it increases and so the quantity demanded will increase.

The Supply Curve is sloped from bottom left to top right. In the same sort of way, if the price of this certain good or service is low, firms and companies will have less of an incentive to supply the good as there will be a poor profit margin and a low return on investment (ROI). As the price increases, it makes more business sense to start producing the good or service and so the quantity supplied will increase too.

On the diagram, you can also see that I’ve labelled a point where the Demand Curve crossed the Supple Curve. This is called the equilibrium point and is where the free market pushes prices and supply towards (thanks to The Invisible Hand if you’re a follower of Adam Smith).

How Does This Relate To Blog Advertising?

Whilst I have been talking in a generalised fashion, this simple economics actually relates directly to not only the sale of blog advertising, but the sale of all products and services with the economy as a whole. Let’s use my blog as an example:

In the header area, I currently have 3 image adverts running, which are placed below the logo. The supply is fixed, as there are only 3 spaces available to the consumer (the advertisers) at the moment. I have chosen to price these image adverts at $70 each per month. Whilst they have begun to sell a lot more in recent months due to my higher readership (which from a more complicated economics view would shift the Demand Curve to the right), in the beginning, I found it hard to shift the ad space.

This may have been foolish of me, as I refused to sell out for a lower price, and instead filled up the spaces with poorly performing affiliate programs. The graph below shows that as the price was above the equilibrium point (ie. the point at which I would be selling all my advertising spaces for a good price), the demand for the advertising space was fairly low, whilst the supply of available slots was fairly high. As a result, I found that I had a surplus of advertising space available.

High Price Low Demand

The same sort of principle of selling blog advertising at a high price and only doing small quantities have been adopted by the likes of Problogger and Copyblogger – who are known to have relatively high priced 125x125px spaces and sell only 6 image slots, relative to the size of their blogs, although it could be argued that reputation, the placement of ads, and factors such as whether animated .gifs were allowed may have been a reason for the high prices to reflect this. From what I can recall, Copyblogger used to charge $1000/month for an image advert, although this may have changed.

More Examples

On the other hand, bloggers such as Kumiko from Cashquests are known to have notoriously low prices for their advertising spaces – a PR5 link costs only $15 per month which reflects incredible value for money (don’t worry, she’s not paying me to say this 😉 ). However, if you visit the site, you can see that all 10 available slots to be placed in the “Wealthy Sites” category have been booked.

Low Price High Demand

The demand/supply graph above shows the economics behind this. As the blog advertising is priced low, the demand completely outstrips the limited supply, leading to a sell-out of advertising space and shortages. Of course, Kumiko could raise the price of text links to $25/month and still sell all 10 spaces, however, there will come a point (maybe at $50/month), where the demand will level off, and the links may be harder to sell.

The final example I want to give, of where the equilibrium point seems to have been met and prices are just at the right spot, is the blog advertising available on John Chow. A 125px x 125px image advert here will set you back $500 per month, however John continues to keep selling his advertising spaces month in, month out. Again, this may have something to do with his immense consumer loyalty to his branded blog – but in my eyes, he seems to have got the pricing of advertising just right. His graph can be represented by the first graph I drew at the top of the page.

What Should You Do?

From what I’ve learnt, if you are a seller of blog advertising and have a say over your sellout price, always start pricing low. The reasons for this are:

  • You’ll be able to instantly get a feel for the demand of your advertising spaces and so will be able to judge accordingly whether price increases or cuts should be made in order to sell your slots at the right price for both you and the consumer.
  • You will have an instant inflow of cash if your prices seem reasonable for the advertiser – providing cash for domain buying, hosting or reinvestment.
  • Your site will look very popular if all the ad spaces are sold out, thus causing an increase in readership (remember, people are sheep and want to follow the flock) and maybe even more demand for your advertising – advertisers will want to get in on the successes that your current advertisers are apparently having.

Getting a feel for your niche, and for your advertising market is the most important thing, as it will enable you to pick that perfect equilibrium price, which will benefit both your bottom line, and your advertiser’s ROI.

Photograph by ThomasHawk

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