Why Customer Revenue and Ad Revenue Don’t Mix

Seven reasons why you shouldn’t treat paying customers like product

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We’ve all heard this one by now: If you’re not paying for a product, you are the product.

You should never do this to your paying customers.

There are a whole host of reasons why serving ads to paying customers is a horrible idea — reasons I’ve learned firsthand launching dozens of digital products, from user-generated content sites to two-sided marketplaces to service subscriptions and just about everything in between.

Let’s go over those reasons and make sure you’re not setting up your customer-driven product for failure, whether you’re serving ads or not.

That’s a bold statement, but I can defend it.

I know this is going to come off as controversial, especially to marketers, but the web was never intended to be a commercial marketplace in the traditional sense. Traditional advertising on the Internet never caught on like it did in print, radio, and television.

Think about it this way: The intent of most digital advertising isn’t to expose product value quickly, it’s to follow you around the Internet and wear you down until you click in a moment of weakness. The effectiveness of a single digital ad has dropped to near-zero, and we’re measuring that effectiveness in thousandths of a percent.

Still haven’t convinced you? How about the fact that 68% of all digital advertising runs through three companies — Google, Facebook, and Amazon*? And that’s pre-pandemic.

So when entrepreneurs ask me if advertising is a good revenue stream for their business, it seems irresponsible to say yes.

I’m not naive enough to believe that the free-product-for-data paradigm is going to lead to the downfall of civilization, but I’m aware enough to recognize how that model is chipping away at privacy and security.

The rest of the world is catching on too.

And while we as consumers are making progress in terms of understanding the data-for-dollars value proposition, even accepting it in some cases (looking at you, Facebook), we’re still not 100% straight on the legal and ethical protections that should be in place.

As those legal and ethical remedies come in, they are almost guaranteed to restrict those companies that aren’t Google, Facebook, and Amazon more than Google, Facebook, and Amazon. Because money.

You want to dabble in that minefield? Fine, I’m not here to tell you otherwise.

But when you charge your customers for the privilege of their role as data to be sold to other customers, whether you’re hiding under the veil of advertising or not, you’re going to lose trust as they catch on.

As I outlined above, traditional advertising as applied to the Internet continues to produce diminishing returns. To counter that diminishment, digital advertising relies on strategic consolidation of channels to boost effectiveness.

As content continues to splinter across a multitude of delivery channels, the impact of advertising on a single channel (your product) has waned to next to nothing. The result is that the only viable option for digital advertising is to make huge ad buys across multiple channels. Anything else just isn’t worth doing.

The facade of digital advertising is that it makes the chasing of this kind of consolidation affordable, and for channels with a large enough audience to make that kind of consolidation work (Google, Facebook, Amazon), digital advertising works, to an extent.

Your product is not a television channel. It’s not Google. It’s not even Instagram.

It’s incredibly rare for a product to be sponsored without that product being compromised.

If a sponsor is paying for your product to exist, even in part, they will assume some level of influence over what your product is and does. And rightfully so. Your customers, after all, exert influence on what your product is and does with their revenue dollars. Why should a paying sponsor expect anything different?

The moment your sponsors’ needs and your customers’ needs become incongruent, and my experience tells me this happens pretty quickly, you will have a revolt on your hands. I can’t predict the magnitude of that revolt, or who will pull their money first. You’ll find that out when it happens.

This is more of an issue for the kind of sponsorship that involves a handful of deeper pockets rather than simply selling ad space to random ad space buyers. But that doesn’t mean products that just run ads are exempt.

Advertising takes away both tactical space and mind space from the product itself.

In a digital world where the importance of good form, good user experience, and good user interface has become a major factor in the success of a product, leasing any of those things to a third party risks that success. You’re giving up white space to a function that adds no value for your customer, and in fact, removes value in a lot of cases.

This is because ads also infringe upon customer engagement, focus, and even loyalty by constantly interrupting your customer’s attention.

A little side story: It took me three episodes into the brilliant Apple+ sitcom Ted Lasso to notice the over-emphasis on Apple product usage scattered throughout the show. I was shocked that it took me that long, but once I saw it, I couldn’t unsee it. Now you can’t either.

Whether your customers consciously recognize this diminishment of mind space or not, it will happen.

When entrepreneurs ask me why I don’t like serving ads as a revenue model, I like to say it’s because you’ll end up not being able to serve your customers because you’ll be spending all your time not selling ads.

Google, Facebook, and Amazon are finely tuned machines built on scale, and as we keep finding out, they’re not always tuned to the benefit of either the advertiser or the customer “product” — but rather to the proliferation of impressions and clicks at whatever cost.

You can use your resources to scale that machine or to scale your product.

This should kind of go without saying, but if you need ads or sponsors for your product to survive, you don’t have enough value inherent in your product to cover the cost of producing it.

But what you might not realize is that this is OK, and you don’t need to fix the problem by shoring up revenue with another source.

You need to do one of three things:

  • Recognize that you’re overcharging your customers while the actual value of your product catches up with the potential value. And work on converting potential to actual before those customers give up on you.
  • Reduce your costs, your feature set, your price, or some combination of those three things.
  • If you can’t do either of those first two things, either pivot the idea or become a free product and just serve ads, because doing both doesn’t make economic sense.

A lot of first-time entrepreneurs consider advertising as an additional revenue stream because it seems like easy and guaranteed money. Toss those pre-conceived notions and look at advertising revenue for what it is — one large and amorphous customer who has one use case, and that use case has nothing to do with your mission, your product, or your customers.

Hey! If you found this post actionable or insightful, please consider signing up for my newsletter at joeprocopio.com so you don’t miss any new posts. It’s short and to the point.

(*) https://marketingland.com/almost-70-of-digital-ad-spending-going-to-google-facebook-amazon-says-analyst-firm-262565

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I’m a multi-exit, multi-failure entrepreneur. Building Precision Fermentation & Teaching Startup. Sold Automated Insights & ExitEvent. More at joeprocopio.com

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