Today's thread is on where the ad business model is going & whether you should or shouldn't use it.

This is partially from my own purview - I prev ran an ad company called @launchbit & partly from observing from the sidelines.

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1) First check out my primer on ads here - I talk about why marketers buy ads & how ads are sold (CPA, CPL, CPC, CPM, etc)

The tl;dr is: marketers are only willing to pay up to a certain price based on their OWN customers' lifetime value https://twitter.com/dunkhippo33/status/1256728937343807488?s=20

2) As such, it doesn't matter whether ads are bought and sold on CPA, CPL, CPC, CPM, etc. Marketers will always calculate / guesstimate how much they are willing to pay in any of these formats.

3) E.g. if a marketer can spend up to $100 to acquire a customer, they are willing to spend $100 CPA.

But if they know their landing page converts at roughly 20% into a customer, they'll budget $20 per CPL.

It's the same however you slice and dice it.

4) So if you are an ad network or a publisher, your business model is beholden to your customers' customers... This is a key pt.

If your customers do a bad job converting leads or have a product w/ a low lifetime value, YOUR COMPANY suffers.

5) This was my biggest learning running an ad network. Effectively what I'm saying is that your value as an ad network or publisher is only as good as your customers' value.

6) But let's say your customers are worth a lot. Consumers pay them a lot and have a high LTV.

Advertisers will still only pay a publisher / ad network a fraction of what their customers are work.

7) So let's say I run an ad network and my customer's customers' ave LTV is $100. My customer will only want to pay *up* to $100 to acquire.

In reality, that "up to" means 25%-30% of my customer's worth for a *well funded company*.

8) You can see how ad networks and publishers start to get squeezed. The better business would be to own the whole supply chain -- which I briefly talked about here: https://twitter.com/dunkhippo33/status/1383831493508624393?s=20

9) In essence, what if you could be joint-owners with your advertisers?

Then you see the upside on the remaining 70-75% you are not able to capture on that ad transaction.

This is why I think investing and media go hand in hand.

10) This is why the ad business model is an inefficient model. It leaves LOTS of $$ on the table.

This isn't to say it can't work, but to make up for the inefficiencies, you have to either

1) have massive distribution AND/OR
2) convert users well so marketers pay you more

11) If you have massive distribution -- ie. you can support billions upon billions of impressions, then it doesn't really matter if you optimize how much you make from them.

E.g. FB basically has near infinite # of pageviews because they can always add more ads into your feed.

12) But most networks or publishers cannot achieve this high reach.

So, then you have to really align w/ converting your distribution into conversions.

E.g. Newsletter ads tend to have really high conversion, so marketers are willing to pay more in email than on the web

13)That model works.

But even so, you're still leaving a lot on the table, because publishers / ad networks only capture a fraction of the worth of your customer's customer.

There's a better way to monetize (stay tuned) that aligns w/ the long term of your customer's customer.

14) tl;dr - the traditional ads model leaves a lot on the table. It is tempting to monetize w/ ads for your startup, but in reality, it's one of the worst models to make $$ for *most companies* given these dynamics.

That being said, it's still an impt part of the ecosystem.