Revenue Versus Profit – Why Staying in Business Is Even Harder

Slim margins, fast payouts, and very slow payments are some of the biggest issues facing the sustainability of most networks. Add that to the challenges finding good sustainable traffic, and good sustainable offers, and the result is a business with a lot of variability. What can cause so many to get in over their heads, though, is not the variability but the money – the difference between revenue and profit. The concept sounds so simple – what you make versus what you spend to get it, but once you start digging into the numbers, it’s amazing how much more difficult in practice it is to make the network business viable.

Let’s assume you run a network that does $500k per month, which might seem small or high depending on your perspective. Overall, it’s not a bad business. Many businesses do not earn $6mm/year in revenue. For this example, we will start with relatively thin margins – fair but not excessive, what a network might get in a competitive market such as this – 20%. Our $500k/month business is now a $100k/month business if we look at what the company keeps. For the two man shop that just buys media, that is a none to shabby business. For a network, though, that’s not a lot of working capital, and here’s why. To do $500k/month as a network, you generally need a team. You will have your account manager, an ad sales person, a designer, perhaps an engineer, and maybe some additional operations help. Running lean, you might have a team of five, but you’re more likely to have closer to ten.

With five people and $100k/month in revenue, you now have $25k/month per employee. Will everyone make that? No, but the figures so far do not include the office or any other expenses the business may have. An industry average for technology companies hovers around $10k per month per employee all-in. Assuming a more lean business, that might come to $8k/month. Five people, eight thousand per head per month gives us $40k/month in overhead. Our $500k/month company at 20% gross margin now has $100k – $40k left. That total comes to $60k. Great as that is, here is the problem in today’s network world – the issue mentioned previously, how networks become banks.

A company doing $500k/month revenue at 20% margins has publisher payouts of $400k per month or $100k/week. Some percentage of that $100k/week in accrued publisher payments will get paid before the network gets paid – way before, i.e., weekly. If half of the publishers received weekly payments, our network will pay out $50k each week. The problem? It “only” makes $60k in true profit for the entire month. Using the entire gross profit number, the $100k, that still leaves the company in a hole if it had to pay $50k/week to pubs. These numbers tell us that the company could afford no more than $15k/week in net 7 payments to stay afloat. To afford that $50k per week number, the company would need to make $200k in profit. At $500k in revenue, that means margins greater than 40%. If the network is their only business – they don’t have any margin makers like an internal email list, there is no way they could achieve such numbers. Even worse, the math above doesn’t reflect the typical Net 30 payment terms with most larger advertisers. This means eight weeks of payments before getting paid. Now we know why pre-pays play such a big deal.

Networks, then, are like grocery stores. To work, they have to be really big, but even that doesn’t solve the problem. We would want our network to make $3mm/month if not more. We wold really want a 10x business from our $500k one, a $5mm per month business. That one would give us similar numbers at 20% – $1mm per month in profit versus $100k, and it would cost slightly less. If it took upwards of ten people to run a $6mm/year network, it does not take 100 to run a $60mm one. The weekly payments are still a big issue, and the trick is managing how much cash goes out the door; otherwise, they still might have to borrow funds in order to pay the float. None of this, though, addresses what has happened recently, advertisers not paying (big bills). If it takes a lot of revenue and decent margins to just have the luxury of paying weekly, it takes even more to cover any unforeseen issues. At scale, if a big advertiser balks, e.g., not paying $1mm, our network now has zero dollars left. That is why, in this business you can’t say it enough. It’s not the revenue that counts. It’s the profit. And slim margins make for slim profit and a continuous recipe for stress.