Jeremy Liew on forecasting online ad revenue

Andrew Chen has a good post on how to forecast advertising for web startups:

The right way to model out inventory is a number of equations - I’ll pretend that a site has two types of inventory, their “brand” stuff and their “direct response” (aka remnant) inventory:

Brand revenue = # campaigns sold * average campaign size * brand CPM
Direct response revenue = (total impressions - brand impressions) * remnant CPM
Total revenue = Brand + remnant revenue

In an actual forecast, you could get a ton more detail in the brand revenues side, since what you really care about is the # of ad sales people you have, how many campaigns they’re selling per quarter, the size, etc. Again, think of this as an enterprise sell, and treat it as such.

Essentially, he suggests that brand advertising is a function of the size and efficiency of your direct ad sales force (and is demand constrained) while remnant advertising can go to networks and is supply constrained.

As Ed Sim notes about a direct ad sales force:

… many entrepreneurs underestimate the direct capital and management costs necessary to build such a team. In many ways, building a direct ad sales team is similar to building an enterprise sales team. These thoughts may seem quite basic to you but here they are nevertheless. First, don’t ramp up your sales team too quickly until you have a product to sell. That means if you don’t have scale or enough eyeballs you are better off using Google Adsense. If you don’t heed this advice you may quickly burn yourself out of business. Secondly, I know that many startups may not know what kind of ad units to sell but be careful of not having a standard product list or rate sheet when you go out to the market.

This advice can be difficult to follow in a new market where there are no standard product lists, which is why new forms of advertising are hard.

(Editor's note: Visit Lightspeed's blog for more of Jeremy's posts)