May 29th, 2007
Publishers trying to manage rising online ad revenue against declining print ad revenue are looking at the wrong metrics. Instead of looking at the advertising trends in silos and comparing percentage increases and decreases, they should be looking at the relationship between absolute increases and decreases in ad revenue over time.
For this purpose I’ve created a metric called the Advertising Trend Ratio, which is the ratio of the absolute decline in ad revenue for all shrinking ad revenue sources (i.e. print) to the absolute increase in ad revenue for all growing ad revenue sources (i.e. online).
For example, the Newspaper Association of America just release newspaper advertising data for Q1 2007 (via MediaPost).
Year-over-year first-quarter ad spending on newspaper Web sites grew by 22.3% to $750 million, the Newspaper Association of America reports.
Still, total advertising expenditures at newspapers and their Web sites were down for the period, totaling $10.6 billion for the first quarter of 2007, a 4.8% decrease from the same period a year earlier. Spending for print ads in newspapers totaled $9.8 billion, down 6.4% from the year-ago period.
If you do the math, you’ll see that newspaper online advertising revenue increased in absolute dollar by $136,753,883. Newspaper print advertising revenue decreased in absolute dollars by $670,085,470. Therefore, the Advertising Trend Ratio, i.e. the ratio of print advertising decline to online advertising increase, is 0.204. When the ratio is less than 1, i.e. the absolute decline in print advertising revenue exceeds the absolute increase in online advertising revenue, then you’ve got a big problem.
The goal of all publishers should be to manage this ratio up until it exceeds 1 — when it’s below 1, the business is shrinking. Here’s the formula:
Here’s how you can use the Advertising Trend Ratio to assess trends in advertising economics. Let’s take a look at the newspaper advertising data from Q4 2006:
Advertising expenditures for newspaper Web sites increased by 35 percent to $745.5 million in the fourth quarter versus the same period a year ago, according to preliminary estimates from the Newspaper Association of America.
Spending for print ads in newspapers totaled $13.2 billion, down 3.7 percent versus the same period a year earlier.
So the absolute decline in newspaper print advertising was $507,165,109, and the absolute increase in newspaper online advertising revenue was $193,277,777, resulting in an Adverting Trend Ratio of 0.381. The lower 0.204 ratio for Q1 2007 shows the actual decline in the newspaper advertising economics — a 46.4% decline in the Ad Trend Ratio.
This ratio can be applied beyond advertising to manage all declining revenue streams against all increasing revenue streams.