Selling Ads on Your Site - Why ‘Forever’ is a Long Time

I was recently approached by someone that wanted to purchase advertising space on my blog. The offer looked something like this (numbers have been changed):

Offer price: $500
Pages ad would be placed on: 6
Duration of Agreement: Forever

Bloggers, let me ask you - does that sound like something I should agree to? On one hand, you might say it’s pretty good for a personal blog I write in my free time. However, once we break down the numbers, we’ll see that it’s not.

My reasoning hinges on understanding two financial concepts - opportunity cost and net present value of a perpetuity. I’ve linked those terms to explanatory articles - make sure to have a basic grasp on the two terms before we move forward.

While the $500 sounds pretty good, we can use net present value math to convert the one time payment of $500 in today’s dollars to its equivalent amount in yearly payments, every year, forever. Because we’re working the formula backward, I will use $500 as the net present value (what I would be paid today), and solve for the equivalent yearly payment amount. I will use 4% as the risk free rate, which is just slightly below the return on a US Treasury Bond.

Net Present Value = Yearly Payment Amount / Risk Free Rate of Return
NPV = P / R
$500 = P / 0.05
$500 * 0.05 = P
P = $25 per year
Because the original $500 was for advertisments on 6 pages, divide the final number by 6:
$25 / 6 = $4.17 per page per year

So it turns out that the $500 offer is really equivalent to only $4.17 per ad per year! And not only is that rate extremely low, I’m locked into it forever! It doesn’t seem like nearly as good a deal anymore does it?

Things start looking even worse when we consider the opportunity cost of taking the offer. If I agree to place new ads on my pages, they will replace the Google Adsense ads that exist there now. This means that I would forego the revenue I would normally receive from those ads. That lost revenue is my opportunity cost.

The Adsense banner ads at the bottom of each post don’t do particularly well, but, for estimation purposes, they return about $10/year. This is obviously higher on more popular posts and lower on less popular ones, but $10 is a good average. So, by accepting this new advertising offer, I will be earning $4.17 per page per year from the new ads. However, I will also be foregoing $10 per page per year from Adsense. This means that I will actually be losing $5.83 per page, per year, FOREVER if I accept the offer!

So it turns out what looked like a good deal from the beginning is actually not such a good deal after all. Bloggers - as you consider ways to monetize your blog, be very careful to weigh your alternatives and consider your opportunity costs. Also remember - forever is a long time to be locked into anything, especially a contract that could be costing you money!

Note: If you want to learn more about present value and the time value of money, checkout this powerpoint from the University of California, Santa Barbara.

Another Note: I’m not writing this blog for the money. Anything I take in goes first to cover hosting, and whatever is left over I loan out to budding entrepreneurs in the developing world using Kiva.org. It’s a way to give back to the entrepreneurial community that brings a lot of personal enjoyment for me. You should all check out Kiva, it’s very cool.

Thanks for visiting! To stay updated, subscribe to my

RSS feed. You may also be interested in some of my more popular articles:

You can also check out some posts related to the one you're reading now in the "Related Posts" sidebar section. Once you've found what you're looking for, please join the discussion by leaving some comments of your own!