Relying Solely on AdWords as a Business Model

How would you like to make $115,000 a month? I sure would. That’s how much Sourcetool.com was making off of Google AdSense ads.

And that, apparently, caught the eye – and ire – of Google (GOOG).

Joe Nocera of the NY Times wrote about Sourcetool.com’s dilemma last Friday in his article, “Stuck in Google’s Doghouse“. In short, Sourcetool.com was making $653,000/month in revenue by spending $500,000/month on Google AdWords. That means bidding on sponsored search keywords for about $0.05 – $0.06 a pop to bring traffic to their site, then getting around $0.10 each time someone clicked on an ad. Though Sourcetool.com is adamant that what they’re doing isn’t ad arbitrage, their business model essentially is.

Then Google made some changes to their AdWords algorithm, resulting in an increase of Sourcetool.com’s minimum bid requirements to $1, and in some cases: $5 or $10. The reason given was that Sourcetool.com’s landing pages were not high-enough in quality – they weren’t sufficiently “googly”, in Google-speak. Even after numerous phone calls, rebuttals, and changes to their landing pages, the minimum bid requirement remained. Google’s stance is that their algorithm has spoken. Sourcetool.com’s stance is that something unfair is going on, since Google has made exceptions to others before, including to one of Sourcetool.com’s competitors.

Whatever the case, this basically killed Sourcetool.com’s business model.

One Customer Source, One Revenue Source

Let’s put aside our feelings of ad arbitrage and Google’s practices for a moment here. There are already lots of opinions in the blogosphere, from debating whether or not Google is a monopoly to potential dishonesty within Google’s algorithm to Google doing what’s best for their customers.

Let’s instead talk about Sourcetool.com. Here’s a business that had figured out a way to generate nearly $1.4M a year with a single web property. Not bad!

However, 100% of that revenue was dependent on one source – Google. (Or, more specifically, Google AdWords to bring in traffic, Google AdSense to monetize that traffic.) There’s a strong inherent risk in that. They are at the mercy of one source, and should that source change its policies, go under, or simply turn its back on them, then they’re screwed. And that’s exactly what happened. They got screwed.

To be fair, there are lots of small businesses that rely on one source for their customers and revenue, be it a single product or service, or a single online marketplace like Amazon (AMZN) or Ebay (EBAY).

You know the cliche “don’t put all your eggs in one basket?” When that basket breaks, you’ve lost all your eggs. That’s what will happen if you have only one customer or revenue source. When it breaks, you’ve lost all your customers and all your revenue.

Product Diversification

Although it’s not as relevant to Sourcetool.com, I’m going to touch on product diversification first. In today’s economy, product-line diversification is essential for business stability – just as portfolio diversity is essential for investment stability. Even large corporations realize this. The Walt Disney Company (DIS) is famous for diversifying from cartoons to movies to amusement parks. Apple (AAPL) went from personal computers to mp3 players to mobile phones. And Starbucks (SBUX) sells everything from espressos to board games to CDs.

Which, of course, begs the question – can there be too much diversification? Yes, if it goes beyond your core competencies and brand. But that’s another discussion.

Channel Diversification

Now let’s touch on marketplace or channel diversification. You can look at Google as a kind of distribution channel for Sourcetool.com – it was the primary way for them to acquire customers. No Google, no customers. That’s a pretty simple and scary formula.

The reality of the situation is that Google directs the majority of web traffic nowadays, so most any web-related business needs to work with Google to some extent. But fortunately, there are alternatives.

According to the article, Sourcetool.com was only using Google AdWords to generate traffic. I’m sure that wasn’t the only method, but for the sake of this discussion, let’s assume it was. Here are some other methods:

• Google organic search results, using SEO
• Yahoo! (YHOO) sponsored search
• Yahoo! organic search results
• MSN (MSFT) sponsored search
• MSN organic search results
• Direct URL

Using the direct URL method means massively branding your URL so your customers know it and can type it into a web browser manually. It’s probably the most costly method, but lots of start-ups with strong brand recognition do this – such as Flickr.com, YouTube.com, and PayPal.com. Same goes for large corporations like Pepsi.com, BankOfAmerica.com, and NYTimes.com. (Sure makes having a .com domain name pretty important, huh?)

It’s certainly not easy to diversify your online channels, but relying on one 100% can be disastrous. Say you relied on Google for 80% of your traffic, Yahoo for 15% and MSN for 5%. You’d still have 20% of your traffic if your relationship with Google changed. That’s better than 0%, right?

And as a bonus, for ecommerce retailers out there, Amazon and Ebay aren’t your only channels. The list above also applies to you, as well as these online shopping comparison engines & marketplaces:

• Shopping.com
• Shopzilla.com
• Yahoo! Shopping
• Etsy
• Microsoft Live Search cashback
• BizRate
• NexTag

Revenue Diversification

Now let’s touch upon revenue diversification. Sourcetool.com’s only source of revenue is Google AdSense. Though their current problem is more about customer acquisition via a single channel, it wouldn’t hurt to diversify their revenue streams too, especially if Google were to kick them out of AdSense.

Fortunately for business owners, AdSense isn’t the only ad network in town. There are dozens of others, though none seem to do content matching as well as AdSense right now. Since I’ve listed a bunch of them in my entry about blogging for cash, I won’t repeat them here.

There are also affiliate programs, which work like sales commissions. If you help a retailer sell an item, they’ll pay you a percentage of the sale. Some savvy affiliate marketers are able to make six-figure checks doing this. You’ll also find a number of affiliate programs on my list.

Along with the ads model are sponsorships. Sourcetool.com could try to get sponsorships from various retailers to earn extra income. That would change the nature of their directory though, as they tout themselves as a free directory right now.

There’s also the subscription model, though I’m not sure what kind of premium content Sourcetool.com could offer.

In Conclusion

Relying on a single source of customers or income from a single product or service is an inherently dangerous business model. If that source goes away, so does your business. To solve that, you need to diversify.

If you’re relying solely on Google AdWords for traffic, consider diversifying. Try Yahoo. Try MSN. Try social media marketing. Diversify your customer acquisition methods.

Same goes for your revenue sources. If Google AdSense is your only income generator, consider diversifying. Try another ad network. Try an affiliate program. Try subscription models. Diversify your revenue sources.

Good luck! And remember – diversify diversify diversify!