Does More Traffic Mean More Money?

by Ed Tsunoda on August 12, 2008

One of the most important factors in having a cost-effective web site is constructing a formula for acquiring new users that generates revenue instead of costing money. While paying a cost-per-click for new users might sound like a good idea, it depends on whether or not what you pay is outweighed by how much revenue a new user generates.

It’s a lesson learned by the Internet boom of the late 90s, but far too often lost on web site publishers today. One of the first mistakes new publishers make is thinking that more users equals more money, but that’s not always the case.

As an example, say you have set up your web site to make revenue on ad impressions and you’ve made some deals and you earn a $1.00/CPM. That means per 1,000 ad views, you make one dollar. Now, all you need is new users, so you sign up for AdWords and are paying $0.50 per click and of those users who click thru, 10% become regular users and on top of that you’re getting 10 clicks a day. Sounds good! Now you’ve got new users coming in every day and you’re generating page views and you’re making money…but you’re not. What happened?

Here’s why. Assume each regular user generates 5 pages views, and each page has 3 ads on it, so thats 15 ads, per day, per regular user. That means it’s going to take over a month for each new user to vuew 1,000 ads and generate back the $0.50 it cost to acquire them. And, for each new user you acquired, you paid $0.50 for 9 other web surfers who clicked, but didn’t become regular users. So, it’s going to take almost a year for that one user just to get you to break-even for what it cost to acquire them. And in each month, for each new user you acquire, you’re losing $4.50 because the cost of acquisition ($5.00 – $0.50 for the one new user click and $4.50 for nine clicks per day that don’t become users) is so much more than the revenue a single user generates in a month ($0.50).

If that’s your formula (and it is for a lot of small publishers) every time you get a new user to your web site, you’re losing another $4.50. And while that’s disheartening when you’re getting 10 new users a month and losing $45.00, it’s a disaster if you dump more money into acquiring new users and you get 1,000 new users a month, because suddenly now you’re losing $4,500. And the more money you throw at acquiring new users (which is what most people do when their site isn’t making money) the more money you lose, and the faster you lose it.

That’s what makes SEO (Search Engine Optimization) so important. It’s one really solid way you can acquire new users every day with a low cost of acquisition. You have to work on your web site at a small volume of traffic until you’ve created a formula where the cost of acquiring each new user, is recouped in a short time frame or else the more people that come to your web site, the more money you lose.

If in the same scenario as above you are also working your SEO stuff so that you get 10 new users a day at no cost other than time working on your site and putting up a new story, those 10 users, generate 150 ads a day and in 10 days, you’ve generated 1.5 ‘units’ that earned a $1.00/CPM or a total of $1.50. So now your formula is all profit and you’re making money.

The same hazards apply with using spam or mass e-mail marketing. Even if you send out 1 million emails for $100, if you only convert 100 new users, it’s going to be months before you even get to the break even point on those users, and if you do it every day or every week, you will keep digging a bigger hole and losing more and more money.

The solution lies in realizing that unless you have a web property with trackable metrics that you can use to find a formula where the revenue you generate per user exceeds the cost of acquiring those users, more traffic doesn’t mean more money, it means bigger losses. That’s exactly what happened in the 90s with the INternet boom and subsequent crash. Everyone thought the solution was getting more traffic, but if you’re losing a dollar per user, 100,000 people coming to your web site, just means you’re losing $100,000. And that’s not gonna git er done.


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