Throughout this article we’re going to use banner ads to
represent ‘advertising’ as a whole. There are different ways to advertise, but
banner ads are the most common and since we’re talking about industry averages,
should be reflective of the true cost of advertising. That said…
Banner ads are expensive. The general rule of thumb is $1
for 1000 impressions. Prices can vary, but most of the big sites seem to fall
in this zone. The way they really differ is in the minimum quanitity of
impressions they are willing to sell. Some sell by the buck, most sell in
bundles, and some only sell in big bundles ($500+).
Regardless of quantity, what we really care about is
click through rate (CTR). Every time a webpage loads, all of the banner slots
are filled with a banner. That is an impression. If someone hits refresh or
goes to a new page, that is a new set of banner impressions. CTR is the
percentage of those impressions where someone actually clicks on the banner to
be taken to some other site where they might learn more about the product and
hopefully purchase it. Note that in all of this we never measure whether or not
the person clicking is ‘new.’ If all 1000 impressions go to the same guy and he
clicks every time it would look like we had the most amazing banner ad campaign
in existence despite the fact that we only ever reached a single person.
CTRs vary by website and also vary during the course of
the project. Because many of those impressions are delivered to the same
people, and people are more likely to click something when it is new, CTRs tend
to fall throughout the course of a project. Many websites will tell you their
average CTR prior to purchasing and they seem to fall in the 0.4% to 0.2%
range. Sometimes you can also get samples of successful ads that have CTRs in
the 1-2% range.
This gets us to our first math: calculating the cost per
click. The cost per click is how much we actually paid to get someone to click
on our banner and see what it was we wanted them to see. Here’s what it looks
like:
So if we assume our banner is going to be on the high
side of average (0.4% CTR) we can calculate a cost per click of $0.25 ($1 /
[1000 * 0.004]). That is $0.25 for every person that looked, even if they’ve
looked before and even if it was an accident and they immediately close the browser
window.
Because the point of advertising is to generate
incremental revenue beyond the cost of advertising, we need to next calculate
the conversion rate. Conversion rates are hard to calculate. The overall global
average seems to be about 2.5%, but this is for mature companies who know what
they are doing. Amateurs seem to average closer to 1.5% and a lot of reports I’ve
been reading are indicating closer to 1% for Kickstarter advertising.
Sidebar—I have a hunch for why this is. For most advertising, someone clicks and makes a determination. For Kickstarter advertising, someone clicks and makes a determination, but then also becomes interested in watching the progress of the campaign. Many, many times I’ve seen a banner and thought, ‘Oh hey, I wonder how they’re doing.’ I think Kickstarter conversion rates are artificially low because the information the advertiser wants me to see (why their game is great) at the other end of the link is different from the information I might be going there to see (how much money they've raised).
Let’s take the
global average, 2.5%, and presume that we’ll be more successful than most
Kickstarter projects. The cost per sale looks like this:
So if we assume our 2.5% conversion rate along with our
0.4% CTR, we come out with a cost per sale of $10. Just getting the sale cost
$10. Real quick, if we change our assumptions to a 0.2% CTR and a 1% conversion
rate, that cost per sale jumps to $50. Note that both of these changes are actually closer to what most people actually experience. A cost per sale nearing $50 is not unrealistic!
This probably seems pretty shocking and you might even wonder why so many people bother advertising if what I am saying is true. The reason is that you need this advertising to generate a baseline of support. A lot of people will only back successful projects because they assume it means other people vetted it and it is worth backing. Kickstarter only promotes projects that are already doing well. When a project has a lot of backers, word of mouth kicks in and people like to check in from time to time and see how high the numbers will go. I checked the Double Fine Adventure Kickstarter daily for the first few weeks of the project just to marvel along with everyone else at its rise. Somewhere along there I decided to back it. Small, new game designers can’t get that level of exposure on reputation, so they have to buy it. They buy it through ads.
This probably seems pretty shocking and you might even wonder why so many people bother advertising if what I am saying is true. The reason is that you need this advertising to generate a baseline of support. A lot of people will only back successful projects because they assume it means other people vetted it and it is worth backing. Kickstarter only promotes projects that are already doing well. When a project has a lot of backers, word of mouth kicks in and people like to check in from time to time and see how high the numbers will go. I checked the Double Fine Adventure Kickstarter daily for the first few weeks of the project just to marvel along with everyone else at its rise. Somewhere along there I decided to back it. Small, new game designers can’t get that level of exposure on reputation, so they have to buy it. They buy it through ads.
There are two important takeaways from all of this.
First
is that these costs, the $10 to $50 per sale, are real costs. They are real
costs that are passed onto the backers because if a project isn't profitable it
is going to fail. These costs also don’t add any value for us once we get the
game. Just like shipping, they are this huge portion of the total we have to
pay that we could avoid if we just had a better system.
Second is to think of the ramifications this has on what
types of products are produced. The costs are per sale and whether I’m
trying to sell a $200 game or a $10 game, those costs are the same. What
differs is that the $200 game has a lot more margin to absorb the cost of
advertising. The $10 game has almost no margin and so traditional banner
advertising is a fool’s errand. Since banner ads are the main way to generate
that initial enthusiasm that builds into momentum that culminates in a
successful project, we’ve essentially rigged the system to ensure that fun,
cheap games struggle to get produced.









