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Digital signage networks: Advertising-supported networks

Author: Bill Gerba on 2007-02-13 13:11:18

There are a wide variety of digital signage business models that rely on advertising as either a primary or supplemental revenue source. Some feature screens in retail stores advertising select products. Others place screens in public places and monetize them with ads for nearby products and services. Sometimes the host venues own and operate these networks themselves. Other times they rely on a third party to do so. While I don't know how many profitable ad-driven networks are out there today, the volume of inquiries that our sales team fields for these types of systems would seem to indicate that there is extremely strong interest in this sector. But I still get the feeling that many companies -- even sophisticated, well-funded global players -- may have some preconceived notions about running a profitable ad-driven network that aren't entirely correct.

Who drives the project: Unlike the two previous business models that we've examined (see our articles on experience/branding networks and product merchandising networks), ad-supported digital signage projects may be driven by any number of groups internal or external to the host venues themselves. For example, a retail chain's in-store marketing group may decide to implement a digital signage network and allow their vendors to use some portion of their co-op marketing budgets to advertise on the screens. The deployment of the network might be left up to the store IT department, or it may be outsourced. Likewise, maintenance of the network -- everything from positioning the screens to scheduling the content -- may be handled internally or given to a 3rd party. We've also seen a number of projects that were initially suggested by a third party (usually a company already working with the host venues in some capacity), approved by the venues (usually a retailer or shopping mall), and then subsequently left to that third party to implement and maintain. There are even companies whose entire business is setting up digital signage advertising networks in heterogeneous locations, providing individual retailers and other venues with equipment at little (or no) cost, and then attempting to fill the network with ads. The profits (if any) are then split between the network owner and the venues.

Potential benefits: Depending on the specific nature of the project, an ad-driven network may still be contributing to the in-store experience, promoting a brand, or drawing attention to specific products. However, as their name implies, these networks are really driven by an advertising-based revenue stream. For retailers using some of their co-op marketing budget to display ads for products they sell, the obvious goal is a sales lift for those products. We've also seen successful campaigns that married relevant informational content with ads for applicable products, or brand awareness campaigns that displayed a wide array of products from one vendor in succession. For non-retail networks, the biggest benefits come from advertising complementary (non-competitive) products and services that can promote future business as well. Consider a restaurant network that carries ads for a nearby movie theater, complete with trailers and upcoming showtimes. Customers might go to the movie and return to the restaurant afterwards for dessert, helping drive sales for both of the businesses -- especially if a specific promotional offer and call-to-action is included in the ad. Finally, many networks display relevant news, weather, and/or sports information along with advertisements to make their screens more appealing and valuable to viewers.

Potential risks: The biggest risk in the case of ad-supported networks is that your organization won't be able to sell enough advertising to cover the cost of the hardware, software, and ongoing operations of the network (along with other costs that may be bundled in, such as paying "rent" to your venues). Also, even once you have them signed up, advertisers can be a fickle lot, so we recommend you keep as much information about your network as possible (in the form of playback logs, traffic logs, etc.) to prove its value when it comes time to negotiate (or renegotiate) contracts. Most other risks are relative to the venues in which the screens are deployed, and the types of advertising content shown on them. For example, while some retail venues will have strict review policies to ensure that only appropriate products and services are advertised, others may not. Failure to adhere to the venue's written and unwritten marketing rules (even if no one told you about them) can cause problems, such as advertising competitive brands in rapid succession or advertising products that may be banned due to marketing agreements with other vendors and suppliers.

Common pitfalls: There are at least three very common pitfalls that we've noticed over the years. First, your organization must have some experience selling ads (or have a strong partnership with someone else who does) in order for an ad-supported network to be viable. The only exception to this rule that we've ever seen is when retailers are taking funds from their existing budget to fund an internally-driven advertising network. Other than that, not having ad sales experience is the best metric we've come across for predicting network failure.

Second, make sure your host venues have some skin in the game. Without this motivation, some hosts won't feel compelled to help with network issues when they crop up. The results we've seen have always been better in networks where the host venues were contributing, even in just some token way. As a corollary to this, if you're partnering with a retail chain (or chains) to advertise products being sold in-store, get them to commit some portion of their co-op marketing budget to the project. Otherwise, your potential advertisers may feel double-taxed when asked to spend more on top of the typically mandatory co-op fees. One more corollary to the corollary: don't try and take co-op dollars without your host venue's permission. That's a great way to get kicked out in a hurry.

The last of the big three pitfalls is a poor pricing model. For all of their differences, every ad-driven network has at its core a fairly simple idea: the space and time on each screen in a digital signage network is valuable, and advertisers will pay some amount relative to that perceived value to have their wares displayed there. I say perceived value because the actual benefit of having a 40" LCD on an endcap or in the cereal aisle or in a mall concourse will be different for every prospective advertiser, and at every potential venue. This makes the job of pricing ad inventory extremely complex, and it's not surprising that it's one of the most debated topics in the industry right now. Price your space too high and it won't sell. Price it too low and you'll never recoup your investment, let alone turn a profit. Complex pricing models based on venue, date and time can be effective at capturing the relative values of different screens, but convincing advertisers that there should be so many different price levels (and explaining things like dayparting) will be a challenge.

How to participate: I think that one of the reasons we see so many ad-driven networks come and go is because there are so many ways to participate. These deceptively easy-looking networks draw all sorts of crowds, from ad agencies looking for new services they can offer clients to AV integrators in search of non-traditional revenue sources. While we've seen plenty of startup companies launch small to medium-sized ad networks, the most successful of the lot have been media buyers and planners, and existing ad sales organizations who have leveraged their current customer base to sell the majority of the ad space before deploying a single screen. If you don't have ad sales experience but feel that you can still bring something to the table, whether it's capital, networking and AV expertise, or content creation capabilities, your best chance is to partner with somebody that can sell the ads. Focusing on a local market? Try your local newspaper or cable provider, since they already handle ad sales of one sort or another. If you have plans for a nationwide network, search for an ad sales agency specializing in the niche that you're targeting.

While there are nuances to every ad-driven business model, this overview provides a pretty accurate description of the majority of networks that we've come across. If your eyes have glazed over by the time you've gotten to this paragraph, there's only one thing you really need to remember: if you've never sold ads before, don't run off and build an ad-supported digital signage network on your own. Bring in some expertise first, whether through hiring, partnerships or acquisitions, and your chances for success will increase markedly. And for those who feel there should be more to a digital signage network than just advertising, stay tuned for next week's article on public service networks: digital signs that can make money, provide valuable information to your community, and improve your karma all at once.

Comments (9)

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2008-02-15scook writes:
Thank you for sharing this information freely. It has been a tremendous help in my decision to not move forward with an idea that I had. You made some very valid points that have confirmed some of my fears about starting up this kind of business.
2008-02-16Bill Gerba writes:
scook: Far be it from me to discourage an entrepreneur, but it does seem that a lot of people are jumping on the digital signage bandwagon without really knowing what they're getting themselves into. I'd never, ever say "no, you can't do this" to anyone. But the trends above have been observed over the past several years, and hundreds of newly-minted networks, so I'm pretty confident they're accurate.

You might also want to check out our article on 5 crucial steps that can make or break your digital signage project
2008-02-23Leigh writes:
We had invested to an electronic billboard just recently and we are having a hard time marketing it since its not within our industry-property development.

Most of the prospective advertisers will only take advantage of the trial period and after that, they are good as gone.

Even the higher-ups are not that adept with this, that's why they cannot shed some light to me regarding this matter.

I'm trying to find answers and guides if any to help me with such constraints.

Thank you so much for hearing me out.
2008-02-29Bill Gerba writes:
This is a gross simplification of the main market challenges, but maybe they'll help point you in the right direction:

If you're trying to score national advertisers like Coca-Cola or P&G, you're going to need to have a significant presence in the top 10 DMAs, maybe 20. Less than that and I'd be surprised if they were even willing to do a free trial with you.

For local/regional advertisers, a CPM or OTS is a nice baseline, but most are actually looking for real results (think newspaper classifieds or Craigslist listings). Thus I don't recommend basing your whole argument/sales pitch around how great a CPM you're offering. Figure out a way to track the benefit of the sign, and use that as the main driver in your pitch.

Finally, never ever give ad slots away for free, except if you have to do make-goods, or are giving a gift to a very good customer. Trials should always be paid. I'd recommend first trying to stick with your baseline price but offer the ad for a longer term (e.g. if you normally charge $1000/spot/month, make the introductory offer $1000/spot for 2 months), and only with heavy pressure consider dropping your prices. You're screen real estate is valuable, make sure your potential customers appreciate that (and agree with it) before you let them sign up.
2008-03-25Eric writes:
Our company has a plan for in-store digital signage which we will be investing all costs. We offered 15% of all revenue generated by the ad sales to the retail chain whom we are negotiating with and they are asking for 20%. What do you think is a fair share? We also asked for 10 year term but they offered 5 year term. What is the reasonable term of agreement with venues?
2010-01-17Minakshi writes:
Do a customer needs to pay sales tax for advertising on the digital signage?
2010-01-20Bill Gerba writes:
Hi Eric,

This reply probably finds you too late, but perhaps somebody else will find it useful. The share that the retailer gets should be proportional to their investment. If they're just giving you floor space (or worse, ceiling space), I think 15% is completely fair. However, we've seen time and time again that the networks that perform the best have better venue buy-in. Are they paying for any of the screens? Installations? Is there a mandatory buy-in for them (e.g. do they have to purchase XX minutes of screen time per month?). If the answer is yes, they probably deserve more. I've seen stores demand upwards of 50% or more, but they always have skin in the game in those cases. That reduces the risk for the network manager, which in turn reduces the potential reward.

Minakshi: I'm not a lawyer, and the law is going to be different in every locale, but often advertising is classified as a "service" and isn't subject to sales tax. This again varies from state-to-state, and in fact some municipalities charge *extra* taxes for advertising-related services, so my advice is to check with your local and state governments to see what services (if any) are subject to sales tax.
2010-01-21Minakshi writes:
Thank you so much Bill!! It was really helpful.
2010-02-18steve writes:
Can anyone suggest a good media sales agency for a network hosted in medical facilities?

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