It is one of the most important choices a publisher or webmaster can make for a Web site financial plan.
It is tempting to chase a high profit margin, but excessive margins are a positive in the short term and a negative in the long term. No business can maintain an unreasonably high margin over time without undermining growth or creating an opportunity for competitors.
Media sites in the early days lost a great deal of money and were seen as a drag on their parent companies. Now the opposite is true for some sites: Their parent companies need to boost sagging profits and are pushing for higher margins out of their Internet operations.
Site Profit Margins
Some media sites are generating 40 percent margins and even more, while at the same time not investing in growth because of the desire — and some cases the dire need — for holding onto the profits.
But few online businesses can maintain both a 40 percent margin and a 40 percent growth rate. The money for growth has to come from somewhere because a site can’t keep growing aggressively without adding staff, content, new features and more marketing to attract the site audience that fuels growth.
Misleading accounting practices also can make growth plans more complicated. Some companies include certain online expenses in the traditional side of the business, which makes the margin look higher than reality.
Others lay excess fees and commissions onto the digital operations, which make them look less profitable.
Classic Chicken and Egg Problem
Publishers face a classic problem: Which comes first, the chicken or the egg?
They fear the risk of investing more money into a site without knowing for certain if they will see a boost in profit, audience and revenue. In some cases, it takes months or even longer to see any benefit from the investment.
But the investment must be made. Those examples of the sites with 40 percent margins actually had no growth at all. The publishers complained that the margins were high, but the total profit wasn’t enough to incent them to invest more. And again, some of them simply needed the money.
One of the best ways to cross that bridge is by first spending less money instead of more to get the same results. In other words, take a hard look at how and where the money is being spent. Track return on investment, cut back where the expense isn’t justified and spend more where it does return results.
Publishers often can save money or make more money with the following tactics:
- Optimize site images to reduce bandwidth and server space costs.
- Audit site ad placement to find pages that might be missing ad positions.
- Switch vendors or re-negotiate with them.
- Audit staff time to see if hours can be cut back or tasks shifted to more profitable pursuits.
- Develop new streams of revenue rather than relying on just one or two.
Expense reductions will increase profit. New revenue streams will increase profit. Labor efficiency will increase website profit.
This growth will lead to confidence in how the site is being managed and the confidence to invest more in it.
Finding the Right Balance
Competitive sites need to strike a balance between profit margin and profit growth that suits the demands of the operation, the company and the business environment.
What is the right Web site profit margin? Start with the competition. If the largest and most profitable Internet companies on the planet can reach margins of 20 percent, it stands to reason that an online media operation should operate with a lower one and reinvest the money in its growth.
But more and more, the environment is becoming so intensely competitive that the survivors may be the ones who surive on the smallest margins possible. Otherwise, competitors will dive in who are willing to accept even smaller margins and put established businesses at risk.
There is one last point to keep in mind:
The online audience is now growing at a single digit pace per year. Online advertising is now growing at low double digit rates. The business is becoming mature.
Past growth was easy because it relied on the fast growth of the Internet. Future growth for any online business will require taking market share away from other businesses.
The balance between margin and growth is starting to favor growth.