Why avoid Advertising as your revenue model

The more I live an entrepreneurial life, the less inclined I am to consider new business ideas that use advertising as the key revenue generator. Advertising in general has proven to be an extremely fickle industry, duly rocked by any signs of economic uncertainty.

Recently Mark Cuban put up a challenge on his blog which he referred to as open source funding. Top line stuff.. post your business ideas on the blog and he will consider funding it. However there was an interesting catch, one of the prerequisites was that the business could not generate its revenue from advertising. There was a backlash (albeit sycophantic ones.. err excuse me sir.. umm please… type of thing) in the blog comments about why they can’t use advertising. Mr Cuban put it there for a reason, he knows the pitfalls and hurdles of using advertising as revenue.

Advertising as revenue is very temperamental and difficult to sustain but most notably it’s a very long hard slog to get it to a profitable stage. Anyone who has a website or a blog knows that generating traffic is not particularly easy, let alone generating enough traffic to make it profitable. These same people also know that you don’t generate traffic overnight and it takes years and years of picking away at it to get to decent traffic levels.

The advertising supporting a business businesses is not viral, their offering is viral. So why not sell the object that is viral in the first place? Now that would be profitable. As Seth Godin would put it, ‘the sneezers’ for a good product, sneeze loud and clear and people listen. Who sneezes after using a good advertising portal? Is a good advertising portal sneezable? Remember your dealing companies and business who are competing for the same market, if they find a good advertising medium they would most probably keep it to themselves. So what that means is that you as a company director, as a salesman, need to contact, pitch, negotiate and sell to as many advertisers as possible, one to one, to get business trickling in. Their is little assistance from word of mouth so the rate of growth is directly proportional to the hours you put in and the numbers of potential clients you have been able to speak to. If you had found an effective advertising medium would you tell your find to your competitors? So forget about a group of loyal and happy customers spreading the word. Reaching critical mass with this model is an excruciating and drawn out process.

Think Facebook. Think Myspace. Think Twitter. What do we know about their revenue model? It has been well documented that these guys simply can’t find a way to tap into their massive user base and turn it into cash. More important to note is that their service of social networking spread like mad because they offered an extraordinary service. The advertising isn’t extraordinary. Tapping into the advertiser market doesn’t come as freely, even with hundreds of millions of users and impressions. But of course the word is being spread, its just not the words they really want to hear.