TechCrunch has a guest post from Eric Clemons, Professor of Operations and Information Management at The Wharton School. The article, Why Advertising Is Failing On The Internet, talks about how online advertising in it’s current format is doomed.
This got me thinking about the relationship of advertising to free online dating sites. I started out thinking this post would be about how the drop in ad revenue discussed in the TC post would affect online dating, but decided I’d throw out my more general observations about advertising and online dating instead.
Granted, advertising is not going to hurt online dating, but as a revenue source in it’s current format, it’s certainly not helping. Connecting brands with customers on dating sites is wide open territory at this point. No dating site has cracked the code yet, most are relying on ad serving networks to deliver targeted advertising. This is a big mistake I hope will be addressed by smaller ad networks catering to online dating sites.
Disclaimer: I often run ad-blocking software in Firefox. When it’s not on, I probably click an ad every week or so. I’m also very good at ignoring ads when I’m browsing. I think display advertising on the internet is broken and marketers for the most part are either stuck in their ways or choose to remain ignorant instead of trying to fix the problem. Paid dating sites that feature ads drive me crazy.
In order to make enough money to survive, free dating sites are currently stuck in a revenue rut. All they can do to earn enough money to keep the lights on and the servers running is plaster sites with (for the most part) un-targeted advertising.
PlentyofFish is trying an interesting experiment where members can purchase a badge that identifies them as a Serious Dater. The badge simply signifies intent and is a weak value proposition, because even an axe murderer can buy a badge. But some people will buy them.
Diversity in revenue streams is a good thing for online dating sites, but there are only so many Dr. Phil DVD’s people will buy, especially since he’s doing a good job impersonating Jerry Springer these days. Highlights in the search results seem to backfire – “If she felt the need to place a red border around her profile, what’s wrong with her?”
POF is now a hybrid free/paid. The basic site functionality is still free, but you’ll be able to buy all sorts of bling for your profile. PlentyofFish is turning into Myspace whereas OKCupid is becoming Facebook. Plenty of holes in this analogy but you get my point. I would pay POF $25/year for a custom-looking profile. I’m not saying clowns-on-acid Myspace custom, just something that isn’t quite so horrid to look at and easier to read.
Let’s think about two different types of online display advertising.
With CPM advertising, a certain number of visitors are required to visit the site and simply view ads in order for the dating site to get paid. CPM advertising is for the pro’s. If you’re not spot on with your creative, you’re throwing good money after bad.
The CPC model still requires a ton of visitors, because only an infinitesimal amount will actually click that University of Phoenix/fat burner/mortgage ad. That’s two ways ads are priced, there are others like Cost Per Action but I won’t get into those here.
Regardless of the type of ads displayed, any free dating site with fewer visitors than necessary to remain profitable through clicks or impressions will fail. Let’s say the magic number is 200k monthly uniques. If the site receives less than 200k visitors, it doesn’t make enough revenue to stay afloat.
However, it is very difficult to start a dating site with an empty database of members. Thats why White Label Dating appears to be running away with the paid dating white label market. Their value proposition to startups is that they enable you to launch your site pre-populated with members, avoiding the empty database problem.
If the future of online dating is free, why isn’t someone buying up 10-20 dating sites comprised of many demographics and starting Free White Label Dating? Build an ad-targeting system, integrate with Facebook for new members, buy a few sites and bam, there you have it. Is this a crazy idea?
What happens when ad prices bottom out or we simply start using browsers that block ads by default? Will POF and OKCupid disappear? Does this mean that there is no way a free dating site can ever launch without considerable marketing costs? (Ignoring Facebook for now, there are still costs associated with the development and ongoing maintenance of FB apps).
I talk to lots of people considering starting free dating sites. I tell them to go talk someone into giving them $250,00 for early-stage marketing, then think about starting the site. That’s what it costs to start a successful free dating site. At least. Anything less and you’re going to run out of money before you hit the magic number of members required to run a self-sustaining free dating site.
I’m sure people will disagree with my numbers, we have to start with some baseline assumptions, please feel free to correct me in the comments.
The fact is, no other sector online has the failure rate of online dating. But dead dating sites are like zombies, they limp along in the night on $20/month servers, never quite expiring, becoming more of a hindrance than a help to singles.
People think you can throw up a site and the money will start pouring in. It’s not even that way with White Label Dating. You only get paid for the members you convince to sign up to your site. Guess what, that costs money ($2-$10k month at least to really get going) and now you don’t run a dating site, you’re essentially an affiliate marketer. When most people hear this they usually say they had no idea that’s how it works.
Do you know which dating site could turn online advertising on it’s head? Friendfinder network. Problem is, they are so clenched about the IPO that’s not happening anytime soon that they are unable to see what an amazing opportunity lies at their feet. All the great ideas end up in pr0n/adult first, as usual. I’m not going to explain it here, the idea is just so darn good I’m going to let it percolate for a while.
What happens next for free online dating sites? Giant expanding ads for Viagra and SinglesNet? Or perhaps the current circa-1999 web-ring style of ads networks will continue, where every ad on a dating site is for another dating site? As a single person, I don’t like that model much. It may be good for business but what kind of message are you sending to your members when all you want them to do is leave your site for somewhere else because you’ll make more money off of them that way?
Hopefully this dislodged some thoughts that we can take up in the comments. Off to get a haircut.
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Good Post David,
I’m curious to hear what your idea is for Friendfinder. They offer a feature rich dating experience but as you say they are concentrating on other things at the moment. Lately they have stuck ugly ads all over the place, just to make a little extra money (and not much according to the IPO document). Any dating site which has a paid membership should not be displaying ads to their members.
Friendfinder is one of the few paid dating sites at the moment which offer an upgrade that allows paid members to contact all members. This is great and I bet it is where the dating industry as a whole is heading. In reality though this upgrade shouldn’t be and add-on, it should be rolled into their existing membership plans.
Dave,
Do you have any backing data for a $25K starting marketing budget, or is this just a number you suspect might be needed? Seems a little high to me, more like $10K might be in line.
Regardless, as you say, there’s STILL way too much of a mentality about websites in general, that its all magic and simply putting up a website means the cash will start flowing in. To reference South Park: Phase 1: Website. Phase 3: PROFIT! (Phase 2? we’ll worry about that later.)
I don’t think its all doom and gloom for free dating sites, or any site that relies on ad revenue. Most free sites tend to be and are expected to be lean operations. (Just what is the base monthly costs for POF anyways? A few thousand at most for servers and bandwidth?) There’s no reason either could survive a serious downturn in revenue. Unless that is the owner(s)’s lifestyle expenses start outpacing the gravy train. ;-)
Free dating sites that are a part of pay-for corporation’s portfolio, such as DownToEarth, may be a different story. The parent corporation will probably close down and/or sell off the site since it is not pulling it’s weight in comparison to the pay-for operations.
– Michael
Michael, search this blog for POF monthly expenses, or Markus’ own blog, he lays out the costs clearly. What he doesn’t mention is the cost to acquire new members, which is a large portion of his revenue.
You’re wrong about DTE, they will let it ride for a long time. In just a few months it’s already larger than 95% of all dating sites out there and funnels traffic to IAC web properties.
You have to take a integrity, sincerity and relationship stability test before you can buy a badge…
David – nice post, really good to see opinion and something to provoke thoughts.
A lot of our partners asked about running free dating sites on our platform last year and like most people in this industry, we investigated free to counter the threat of PoF.
However, since the end of 2008 we’ve seen the perceived threat from free dating sites diminish significantly.
The reason we didn’t launch a free version of white label dating is simply because there’s not enough money in it – PoF is huge and makes decent revenue, but the market isn’t big enough for more free sites. When we ran the numbers it just wasn’t worth doing which is why we’ve stuck with paid dating and our partners have benefitted.
Server costs may be low (I’d suspect a site like PoF is spending around $50k/month at least on servers and crucially bandwidth) but there are significant costs in customer acquisition. For paid dating sites as well, pretty much all the cost relates to customer acquisition – when you have millions of members, the cost of supporting each member is tiny in comparison to the revenue from the members, so the greatest cost related specifically to a member is acquiring them in the first place.
As for white label partners being labelled “affiliate marketeers” – okay, I’ll bite ;) The fact is that running a site on a white label platform allows you to build your own brand (rather than someone else’s brand as affiliates do) and build a valuable proposition that can be sold. Affiliates of dating sites don’t really have a business to sell – they work their arses off (yes arses, say it with a brit accent) but have no exit opportunity as their income relies on their affiliate cleverness.
Our partners, on the other hand, are building a brand, with continually increasing monthly revenues and no costs except marketing – that is a very attractive proposition to most investors and we’ve already seen a number of our partners receive investment for their business within a year of them launching.
Markus will make PoF work in the advertising downturn, but there’s not room for other players in this space. There is, however, still plenty of space in the paid dating market judging by the growth partners are seeing.
Now – what’s happening with periphery players like WooMe.com, Omnidate, etc – any thoughts on where they’re going to go over the next couple of years?
Let’s say pseudo-affiliate then. I can’t tweak the website much, all I control is the marketing message, the url and some basic colors. What is this exit opportunity, what can they possibly sell?
Check out the trajectory of Woome and SpeedDate, very similar growth patterns.
http://siteanalytics.compete.com/woome.com+speeddate.com/?metric=uv
Woome will always have an audience, young obnoxious 20-somethings who like to show off and flirt with scantily-clad women and the voyeurs who like to watch that sort of thing. That is a lock for the time being.
Omnidate is a completely different animal, diff demo’s and value prop. Woome is most likely going to create embed code for dating sites, making it easy to integrate with dating sites. Woome is easy breezy simple and fun. Omnidate is a bit “heavier” in nature.
Woome markets directly to users with their $12 million war chest. Omnidate has to rely on dating sites partnering with them in order to get traction. This is an enormous impediment to growth. Lot’s more friction with Omnidate.
Hi Dave,
What I meat about DTE is Match.com, or more appropriately IAC – Match’s parent company, may cut loose DTE if the revenue stream is not meeting their expectations. I could see them being jaded by their pay-for sites. Just because DTE is outpacing growth in the free dating arena doesn’t not necessarily translate into revenue performance that satisfies Match’s or IAC’s boards.
On the flip side, DTE could be justified as a funnel to the pay-for dating sites, or any of the other IAC site. In which case they would be stupid to close it down.
2009 is going to be an interest year.
– Michael
FYI, IAC stock performance isn’t doing so hot these days. High of ~$135 back in April 2004, tanked on August 21st 2008 from $35 to $16, and has been hovering at or below $15 ever since. Also, for the last two years the company has been operating at a loss. Income is down from $870M ending 2007, to $374M ending 2008. This might have some any effect on Match as IAC tries to return to profitability.
Anyone know what happened to IAC on 8/21/2008? This was a couple months before the general stock market crash.
D’oh! I totally blanked your mention about IAC web sites.. Ignore my second paragraph there since I’m just parroting what you said already. My apologies.
White label dating is plain affiliate marketing, nothing else. If you are ever to invest good money into _your_ own dating site why would you give up control? Invest those $2-$10K into a new dating site but care to target specific audience – this is what’s going to give better ROI than any 3rd party database.
Ross you say “Our partners, on the other hand, are building a brand, with continually increasing monthly revenues and no costs except marketing” yet as the post clearly points out marketing is essentially 95% of the expenditure for any dating site.
Your website states “You provide your brand, website design and marketing and we do the rest.” To me that makes White Label an affiliate program. Saying someone can have their own website design is just adding fluff to an affiliate program in my opinion.
My site wouldn’t even register on the dating site scale but our emphasis is on members, so we don’t display ads and they know who owns and runs the site they choose to join. It’s never going to make me rich but I sleep well at night.
Apologies it’s the post after this one that discusses marketing costs for online dating but my last comment still stands.
I don’t want to get into a slanging match – the numbers speak for themselves, our growth has been on the back of a decline in dating software operators and mainstream dating affiliates – they’ve suffered as white label dating has prospered. It’d be great if everyone could have a big piece of the cake, but the reality is that partners are choosing to use a white label platform rather than being an affiliate or running their own software and database because the opportunity is more compelling to them. That’s the only reason we’ve grown so much and continue to dominate the market – it’s partners choosing to do that.
Re. valuation – effectively what some of our partners now have is a good site generating $100k/month or more. If they put no more marketing into the site then the following month it will still generate around $80k/month – the month after that (again, with no marketing by them) the site will still generate around $64k and so on and so on. This is because the site sites on a network which is still generating new members through other sites on that network – so even if the site owner stops marketing, new members will appear on their site via the network.
This revenue without spend is pure operating profit.
The value of any business is influenced heavily by the systems it has in place – eg. if you strip out the owners of the business, does it have the right systems in place to ensure continued profitable growth? Partners on our platform provide the marketing system (eg. spend X, generate Y) and we provide the rest of the systems – this is why it’s an attractive opportunity to investors. Once the partners have established their sites with a good brand and a marketing system, they require very little extra input.
This isn’t the place for a debate on the issue – I’d be very happy to debate this at the next iDate or other conference. I would, with respect, suggest that the numbers speak for themselves – online marketeers will choose the option that makes them the most short, medium and long term profit and value – and in all those cases they’re finding that a white label platform is the better option and that’s why there has been such significant growth over the last couple of years in this area.
Anyway, this post is about advertising killing free online dating – it’d be great for Markus to post more info on growth of his revenues or profits.
And remember what happened to the Radio Star:
http://www.youtube.com/watch?v=XWtHEmVjVw8
Understood Sally – you probably know one of our partners http://www.kissinggates.com/ who is getting rich from their site which they own – however there will always be a market for the really niche sites and that’s no bad thing.
Markus, how has forcing people to take a personality test affected sales of serious member badges?
Great question David, I’m curious about that too!
Nice synopsis on the advertising debate. I do not see advertising going anywhere, but I do see it changing. I believe that we will see advertising converging with new media, given to the audience in ways that are much more ingrained in their experience, such as with video clips. Advertising that attaches itself to required actions users take on the site, such as giving virtual gifts that represent real products for example.
-Veronica
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