May 29th, 2007

Advertising Trend Ratio: A New Metric For Publishers

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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:

advertising-trend-ratio.jpg

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.

and

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.

Comments (10 Responses so far)

  1. point, Ms. Moore summed up: “People is the most powerful magazine, and the most profitable magazine, on the planet.” As usual, there are no specifics on how online and print are contributing to the magazine’s profitability, i.e. no idea what the advertising trend ratio is. I’d guess that, unlike newspapers and some magazines, People in print may be growing ad revenue, but managing People’s print and online economics as more people consume the brand online will still be a big challenge. Let

  2. , who has some interesting thoughts on how surface computing could further reduce our dependency on paper.) The article with video also got picked up on Digg. I don’t know how Popular Mechanics is doing with its advertising trend ratio, but it’s definitely an example of a traditional media brand that “gets it” and is now going about the hard work of figuring out how to get it done.

  3. Advertising Trend Ratio: A New Metric For Publishers » Publishing 2.0

  4. Your math is correct but if you are implying that newspapers (for example) must increase their web revenue to make up for print losses in a 1 to 1 ratio, it’s just not sustainable.
    Web revenue will grow and print will decrease, but in the end these companies will be smaller, even if the profit per employee is greater at some point.
    There are just too many places for that money to go, like maintaining a site and disintermediating altogether, or buying Google ads, or CableTV , or Yellow pages.
    You agree?

  5. Matt,

    I do agree generally — I don’t really think most newspapers businesses can avoid shrinking. My real purposes was to cut past all of the spin about increasing online revenue and focus on a metric that shows how the newspaper business is really trending, i.e. it is shrinking.

    What’s interesting is that TV is about to face the same problem.

  6. I agree that TV is the next victim.
    It’s kind of all related to what Doc Searls would say was , “the demand side supplying itself.”
    When free tools like Bit Torrent or even Blogging software are ubiquitous, it’s just a major paradigm shift.

    You might be interested to know that I just inherited a few “hurting” local newspaer sites, and have the go ahead to make them right.

    Free archives, extensive RSS feeds, interfacing with APIs like Flickr and Twitter.

    It should be interesting to see if following the advice of folks like you and the rest of the smart bloggers can be executed successfully.

    I’ll be giving a chronicle of the whole thing over at my blog in the coming weeks, so keep tuned. (in fact, do me a favor and subscribe. i’d like to get a lot of voices involved in helping me work the building of these sites out.)

  7. A better way to state the Advertising Trend Ratio is in percentages.

    In the First quarter of 2007, the absolute increase in online advertising accounted for just over 20% of the absolute decrease in print advertising.

    Or even better: for every $1 lost in print advertising, newspapers are gaining $0.20 in online advertising.

    You have definitely found an appropriate metric, but putting into real numbers might help shine a better light on the ever shrinking revenue for newspapers.

  8. As Matt alludes to, yes, gross revenue online is growing at a slower rate compared to the more precipitous decline in print – but the question remains, what is the margin on each of those dollars. There is more noise in those numbers to cut thru before you have a clear picture about where is the crossover point to a stable and sustainable business.

  9. [...] So if this is right (feel free to check my math), then May 2006 to May 2007, print ad revenue for the News Media Group decline $19.2 million or 14.4%, dwarfing the $2.8 million increase in online ad revenue. Not a great advertising trend ratio. [...]

  10. [...] So if this is right (feel free to check my math), then May 2006 to May 2007, print ad revenue for the News Media Group decline $19.2 million or 14.4%, dwarfing the $2.8 million increase in online ad revenue. Not a great advertising trend ratio. [...]

  11. [...] So if this is right (feel free to check my math), then May 2006 to May 2007, print ad revenue for the News Media Group decline $19.2 million or 14.4%, dwarfing the $2.8 million increase in online ad revenue. Not a great advertising trend ratio. [...]

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