New forms of advertising are hard

I’ve seen a few startups recently that are relying on launching a new form of advertising as their business model. These can include product placements, sponsorships of various flavors, new forms of local advertising, interactive out-of-home advertising, and lots of variations of mobile advertising. This is a hard business. If successful, it can be very, very successful (e.g. Overture/Google with sponsored links in search) but entrepreneurs often underestimate how long it will take for revenues to ramp.

To understand how new forms of advertising get adopted, you need to understand how advertising is bought today. In most instances, ad agencies control the ad budgets for the largest advertisers in the world. Within those ad agencies, one of the functions is media buying. A media buyer’s role is to optimize reach (and sometimes quality of audience) for their client across all possible advertising channels. The problem with new forms of advertising is that they are often not represented in the media buyers’ spreadsheets and models. And if it’s not in the model, it doesn’t get allocated any ad spend.

Startups sometimes get traction with a new form of advertising because there are always some forward thinking advertiers who are willing to experiment. This early traction is often a customized program negotiated with an advertiser that is friendly with the startup through personal relationships. However, crossing over from a “business development” focused model (where each new deal is custom crafted) to an “ad sales” focused model (where standardized products are sold off of a rate card) is the key to massive scalability of revenues. To do this you need to get into the media buying model; you need to sell a standardized product.

For internet companies, that usually means that you need to get the IAB (Internet Advertising Bureau) to issue a new “Standard” ad unit, in much the same way that the IAB issued its first set of “voluntary guidelines” that set up 8 standard banner ad units in 1996, a massive reduction from the over 150 ad sizes that were in use at the time. This standardization greatly eases logistical complexity for both advertiers and media companies.

The process of creating a new standard can be quite a lengthy one. It usually involves a coalition of both media companies and advertisers coming together and negotiating the key elements of the standard. The composition of the IAB board is usually dominated by larger online media companies and it can be hard for a startup to have much influence on this decision making process. It can often be easier to align youself with the interests of a larger media company and let them carry the water up the hill, rather than trying to do it independantly as a startup. If you’re Dogster, you’ll have less success pushing a new standard for “sponsored profiles” than MySpace/FIM or AIMpages/AOL. So making sure that your sponsored profiles packages contain the same elements as those of the big guys will make your life easier as they take this new ad unit through the standardization process

The alternative approach is to make sure that your new form of advertising so closely parallels an existing standard ad unit that it can be considered within the existing bucket. 30 second online video ads (same format as TV),online leads (similar to phone leads) and new variations of CPC advertising (similar to search) have all been “close enough” to an existing ad unit that they have been able to tap existing ad budgets and grow quickly.

In either case, when building business plans on the assumption of the adoption of new ad units, make sure you give yourself enough time in your plans for the market to be created before it can grow to scale.