Enjoy High Online Margins While You Still Can

Many media companies who have successfully embraced online media will tell you that margins online are significantly higher than those in print. One would expect this from an incremental business that leverages an existing brand, existing content and sales teams, as well as corporate infrastructure. Personally, I expect the incremental online business of any media company to generate at least 40% margin.

This is one reason why we see such high multiples for media companies who have solid online media businesses. Even if total revenues are rather static, as long as the company has a solid, growing online media business, the company is making a greater profit from the same markets and assets. It is dropping a greater percentage of each dollar earned to the bottom line which is good for cash flow and enterprise value.

Despite being a legitimate media for well over 10 years now, online is still transitional and in many markets, media companies, marketers, and agencies have yet to fully embrace online opportunities. It is during this transitional time that early movers can command higher margins because of a lack of competition. But this phenomenon will not last forever. Wherever there are high margin businesses, there will be companies who are willing to grow their business by accepting a smaller margin and taking away market share instead. As competition continues to increase online, margins will begin to shrink.

Consider the four stages of the eMedia Adoption S-Curve. Stages 2 and 3 in a given market are where a media company can command the highest premiums from their customers. Advertiser demand typically outstrips the ability of media companies to fulfill. Sell through rates are high and rates can be held strong due to supply and demand. Toward the end of stage 3 and into stage 4, however, most media companies in a given market have adapted to online and emerging, non-traditional online media companies also increase the competition. There is still overall growth in the market, but it comes much more slowly and at lower margins. In Stage 4, it isn’t the first movers that continue to grow, but those who can execute most efficiently and operate successfully on reduced margins.

One example of this is when I helped revitalize Penton’s electronic engineering online business. At the time, this market was squarely in late Phase 2 or early Phase 3. Our two biggest competitors online were EE Times (CMP) and EDN (Reed) and we were significantly behind. From the intelligence we could gather, these two sites generated 7 million and 4 million page views per month respectively and had significant advertising revenues at high CPMs. We had recently relaunched Electronic Design and were generating around 1 million page views per month. The good news, however, was that we were starting from virtually no revenue and thus had nowhere to go but up and were not concerned about cannibalizing any other high-margin business.

Our strategy was to go to market with ads that had greater impact and were priced about 15% under the competition. With fewer, bigger ads on each page, our response rates were higher (at least according to several of our advertisers). And if you are an advertiser buying 100,000 impressions, it doesn’t matter if the site you are buying has 7 million or 1 million total page views. You’re only buying 100,000 of them. The combination of lower prices and higher response rates added up rapidly growing our online business from nothing to well into the 7 digits.

Webinars are another classic example of the eMedia Adoption S-Curve in action. Early on in a market, publishers can command high prices for webinars — especially when only one publisher is really leading the webinar effort. However, as more publishers wake up to the power and lead generation capability of webinars in their market, the price point they can get for a webinar starts to drop due to increased competition. Even though webinars may remain a high-margin business in a given market, they will not be as profitable as they once were.

The key is that in a Stage 4 market, standard online advertising becomes a commodity: banner advertising (even IAB large creative sizes), email advertising, webinars, etc. Once this starts to happen, you enter a slippery slope of continual yield erosion unless you can successfully adapt:

1. Provide better results for your advertisers. Increase the size of your ads and limit your ads per page (increase the share of voice). This increases the brand and response impact the advertiser has on your audience. It also has the added benefit of reducing inventory and leveraging the laws of supply and demand more in your favor and allowing you to keep yields as high as possible.
2. Launch new products in your market that are not yet commoditized. For example, create a streaming video offering, provide unique web site services, develop unique lead generation capabilities, or dominate the mobile and/or instant messaging opportunity in your market. Doing this starts the Adoption S-Curve all over again and gives you new growth products even if “standard” online advertising becomes more of a commodity.
3. Simply outperform your competitors. If you can develop a larger audience, have the inventory available, and aren’t selling out the inventory, don’t be afraid to reduce your price a bit to maximize revenue. Deliver slightly more value for slightly less money and you will rapidly take away market share.
4. Provide superior customer service. In a world where all things are equal, customers will spend money with whoever provides them the best service. Help analyze and suggest improvements on their creative. Provide not just quantitative, but qualitative information on the results of their campaign. Keep continual open lines of communication before, during, and after the sale.

Even doing all of this, it is important for publishers to realize that as competition grows, margins on commoditized emedia products will face increasing challenges. But publishers who continue to lead with innovation and valuable content, and who deliver their advertisers a strong ROI, will still be very successful. Just be prepared to operate a tight and efficient ship.