Tuesday, June 16, 2009

Using Adsense to test your business model

There has been a lot written how entrepreneurs can use Google Adwords to verify whether customer demand exists for their products. Even before you have a product built, you can write a text ad and pay to have it displayed next to search results. If people click on your ad at a solid clip, you have a good sense whether customers are interested in what you are offering.

Another interesting tool is to use Adsense to test your business model. You can use Adsense to answer a simple but important questions - is there money to be made in what I am doing? All too often, entrepreneurs start a social network, blog, or site where there is literally no way to make money. This is a little diagnostic to help avoiding that. Here goes:

Put Adsense on your site. Observe the eCPM. If the CPM is high (say greater than 5 CPM) this is a good sign. If you have low CPM (say less than .5 CPM) this is a bad sign.

The eCPM of your site tells you two important things. First, are you in an industry where there is money to be made. You might not understand yet how to make that money, but someone out there is willing pay for traffic and therefore they know how to make money.

Second, the eCPM tells you whether your vistors have "purchase intent" for something. If they are coming to your site to read an article, message their friends, or write a post, they probably don't have purchase intent for anything and will exhibit a low eCPM. If they are looking for real estate, browsing car prices, or looking at electronics reviews, they will tend to have an higher eCPM.

If you are getting a very low eCPM, I'd encourage you to think very critically about the industry you are getting into and your prospects for making money. Your site could become massively popular, but your business could still be a failure. Your business model will feel like you are squeezing blood from a stone.

In short, you can use Adsense to determine industry profitability and whether you are attracting visitors that might want open their wallets. This does not mean you should use Adsense as your primary business model. Making decent money from 3rd party advertising (even at a high CPMs) requires a level of traffic that most sites will never achieve. However, if you are achieving a strong eCPM, there is a good chance eventually you'll figure out how to make money.

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