Ad Support for Products

by Krishna on May 14, 2007

In yesterday's post about paying customers, I briefly talked about using ads to support a product. Let me expand on that thought.

For any product, you will find a wide range of prices customers are willing to pay. The prices of competitors usually acts as a upper limit to how much you can charge. As for the bottom limit, that could be zero (open source) or even less (you pay people to try your product for free).

The customers I want to talk about are the people who would, under normal circumstances, not pay for your product. They have nothing against your product. They like it if it is offered for free. But they would not pay money for using it. An example would be a TV show. Many people would not pay to watch a TV show episode unless the show was exceptionally good.

In situations where a free product already exists, there are fewer people inclined to purchase the product. This is becoming very common for software applications because software development tools and technologies are increasingly more powerful and the cost of building applications is going down very quickly.

If you are a software hobbyist, developing software and giving it away for free may be a fulfilling experience for you. But if you are a software company, giving software for free without any revenue coming from customers (through direct sales or support) is not a viable business strategy.

It is important to know that when your software is not making enough money, it is not just you who is paying a cost in terms of covering the losses incurred. Your customers are also paying for the loss of product functionality that could have been financed by the missing revenue. The lack of development resources to work on important features and priorities can also be frustrating and demotivating for the development staff.

A software business must charge for its products in one form or another. This may be a direct cost for the product in the form of a one-time purchase cost or a subscription model. The product could be free and support could be charged. Obviously, when you are charging for support, you are also bundling the product development, maintenance and enhancement costs inside that. A third option is using advertisements.

Advertisements are useful because they obtain revenue from the segment of customers who would otherwise not be contributing a cent to your product. The question is: What can you do to get it right? Here are some random thoughts:

  1. No customer being charged a fair price should be subject to ads. Think DVDs. No person in their right mind would buy a DVD if they had to see commercials every 10 minutes. Using ads would maximize the profit per customer, but also reduce the overall number of customers. Assuming that the former does not offset the latter, that is not a good business strategy.
  2. You want to make the ads as unobtrusive as possible because that interferes with the use of your product. That is why popup ads are such a bad idea because their use ruins the customer’s perception of your product or web site.
  3. At the same time, you want each ad to be valuable and hence ads should be visible. Banner images (horizontal or vertical) are good because they attract attention. If ads are not visible, they offer less reward to the advertiser. In the long run, marketers will reduce their spending on such ads.
  4. Visible ads should not be offensive or unwanted. This is a rule that seems to be violated by pretty much everybody. You get ads that have no sensitivity to your values, culture or workplace. I explain a solution after this list.
  5. Visible ads should be relevant. Google AdWords does a good job of matching the content that you are seeing with the ads they deliver. However, it does not mean that they do not violate the previous point.

Let me elaborate on unwanted ads. This is not very easy to do for unauthenticated web sites where pretty much anyone can come and see the content. However, when we are talking about products that are used by logged-in users, we should be able to allow users to provide their preference for what ads they want to see.

  1. Where does the person use the application from? At work, home or a public place like library? This not only influences the nature of the ads that can be shown, it can also provide clues on whether serving an ad will lead to a click-through or purchase in a particular situation.
  2. What cultural aspects should the ad service respect? For example, showing beer ads to Muslims is not only offensive, but also a total waste of advertising dollars. There are many different concerns for different religions, languages, communities, nationalities, etc.
  3. What are the political leanings of the person? Showing a Hummer ad to an environmentalist provides the same results as my example in the previous point.
  4. How about not even trying to guess what the person wants and instead ask them to choose from product categories that they would like to see ads on?
  5. Ask the person whether they like text ads, image ads or video ads. Single banner ads or multiple text ads.
  6. Does it matter what data the person is using? Should ads be tailored to the person or the content? The answer may be different based on the person or the product.
  7. Is there a way the person can rate an ad? Say they like an automobile ad and they want to see more of that brand or more of that ad series.

Giving more control to the user to configure what ads will or won’t be shown will increase the value of the ads. Users will notice them, increasing the cost per impression. Users are more likely to click through them increasing the click-through revenue.

Should you waste valuable development time creating an ad server instead of building some new feature in your product? The answer could be “No, let me just use an existing ad service”, but I think if you can want to maximize user satisfaction in your product, it may be worthwhile looking at some of these ideas.

A final word: People who don’t want to pay for your product are not necessarily those who cannot pay. Many people can afford to purchase your product, but for various reasons, cannot find it easy to part with their money. In fact, the old wisdom goes that the richer a person, the more likely he has got there by being miserly. The point I want to make is that the free customers have money that they can spend. They may be willing to spend that money on the products being advertised on your site. So use that to your advantage.

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