Ad Revenue vs. Subscription Revenue

When it comes to media, content creation, and online services there are two primary ways through which businesses generate income. Ads and subscriptions. Now, both of these can be complex models that rely heavily on the specific elements of a brand. And, there is even a hybrid model, where you take elements of both to maximize your revenue. Therefore, to make sense of all of this, let's take an in-depth look into ad revenue vs. subscription revenue and how one can combine them.

Ad revenue

Ad revenue is the income you can generate by displaying advertisements to an audience. In this model, you essentially sell advertising space on a platform (such as a website, social media platform, or app) to advertisers. Based on the number of views, clicks, or actions taken on their ads, these advertisers will pay you. The more popular your website is, and the more room their ads take up, the more revenue you will generate. For this model, there are a couple of things you should keep in mind.

Pros and cons of ad revenue

When utilized properly, ads can bring regular and decent revenue to a website. But, of course, there are certain downsides to using ads as your primary source of revenue. So, let's outline the pros and cons.

Pros of ad revenue

We'll start with the pros:

1. Potential for high revenue - A website with a large and engaged audience can earn quite a bit from ad revenue. As traffic and engagement increase, so does the potential for higher ad revenue. Keep in mind that the hosted ads don't have to be intrusive to the reader (in fact, it is best if they are not). The mere fact that the reader will notice them will bring a ton of click-throughs and views.
2. Low barrier to entry: In essence, any website can incorporate ads. Setting up ad revenue is relatively easy, especially if you mainly focus on direct ads. In this way, small businesses and content creators can monetize their platforms without significant upfront costs.
3. Diverse monetization opportunities: Keep in mind that ads and monetization models can be quite diverse. There are various ad formats (display ads, video ads, sponsored content, etc.) and revenue models (CPM, CPC, CPA) available. This brings much-needed flexibility for businesses to choose what suits their audience and content best.
4. No direct cost to users: Lastly, ads enable websites to offer free access to content or services, attracting a broader audience. As users don’t have to pay for access, they will be far more willing to check out your content.

Cons of ad revenue

Of course, hosting ads on your website does bring its share of downsides. And depending on what type of online presence you are striving for, these downsides can be deal breakers.

1. Revenue instability - Unfortunately, ad revenue can be unpredictable and subject to market changes, seasonal fluctuations, or overall shifts in advertising trends. Even from month to month, it can be surprisingly difficult to predict how much money you will earn from ads. This makes it less reliable and stable compared to other revenue models.
2. Dependency on traffic and engagement - Whether or not you will make money from ads is heavily dependent on website traffic and user engagement. A decline in these metrics can significantly impact revenue, making your revenue vulnerable to fluctuations beyond your control or immediate oversight.
3. User experience impact - As we all can attest, ads can sometimes be disruptive to the user experience. Unless the brand manager takes great care in add placement, it is quite likely that they will be. This, as you can imagine, will often lead to dissatisfaction or even ad-blocking behavior among users. Furthermore, intrusive or irrelevant ads can negatively affect user retention and engagement. Therefore, even though incorporating ads is essentially free, it is by no means benign.
4. Potential for ad blocking - A general rule of thumb is that people don't want to watch ads. In fact, a considerable number of users actively prevent ads from being displayed on websites or platforms. It is clear that this directly impacts revenue potential by limiting ad impressions or clicks, thus bringing down your earning potential.
5. Complexities in Ad Ecosystem - Keep in mind that while adding ads is relatively straightforward, managing them is far from so. It involves dealing with ad networks, tracking metrics, optimizing ad placements, and staying compliant with changing regulations. For some businesses, the complexity of this extra task can be overwhelming.

Summary

So, in a nutshell, ads are a relatively cheap way to make some extra funds from your content. In the ideal scenario, the quality of your content will be enough to bring users, which will in turn click on ads. In practice, ads can be difficult to properly implement. It is increasingly difficult to find users that are willing to tolerate ads. And even more difficult to find ones that will actively engage with them. Ad placement and management can be a complex task that not all brand managers are up to. So, is opting for a subscription model a better idea?

Subscription revenue

The subscription model entails generating revenue by charging users a periodic fee (monthly, annually, etc.) to access content. Users pay for continuous access to exclusive or premium content. Sometimes brands offer both a free and a subscription model, in order to draw in an otherwise reluctant audience. Others have various subscription levels where the more you pay, the more you get. And, lastly, you have a simple, single-plan subscription model.

Pros and cons of a subscription model

As expected, subscription revenue models have their own set of advantages and disadvantages. To properly understand them, let's outline the major ones:

Pros of subscription revenue:

Again, let's start with the pros.

1. Predictable and recurring income - The most notable benefit of subscription models is that they offer a steady and predictable stream of income. Since users pay on a regular basis (monthly, yearly, etc.) it is fairly easy to calculate what your revenue will be like. This stability allows businesses to make business plans and better plan that revenue in the long run.
2. Higher customer lifetime value - Customer Lifetime Value (CLV) is the amount of revenue you get from a customer during their lifetime. If a customer only does business with you once, they will have a relatively low CLV. But, if they do business time and time again, their CLV will increase. Therefore, it shouldn't come as much of a surprise that subscribers tend to have a higher customer lifetime value (CLV) compared to one-time purchasers. Continual revenue from loyal subscribers can contribute significantly to long-term profitability.
3. Enhanced user engagement and loyalty - As a rule, subscribers are invested in the service or content, leading to higher engagement and stronger loyalty. After all, since they are willing to pay for access to your content, they are likely quite interested in what you have to say and offer. Furthermore, by providing exclusive or premium content/services you can foster a sense of belonging and commitment among subscribers.
4. Reduced dependency on ads - Getting revenue from ads is one thing, but being dependent on them is completely another. Subscription-based models often reduce reliance on ads, providing a cleaner, ad-free experience for users. This will almost always improve user satisfaction and retention.

Cons of subscription revenue

Now, let's outline the cons:

1. Challenges in acquisition and retention - Having a substantial subscriber base paying you on a regular basis does sound great. But building that base of subscribers is easier said than done. Acquiring new subscribers and retaining existing ones can be challenging, even for established brands. Businesses need to continuously demonstrate value to justify the recurring subscription fees and prevent subscriber churn.
2. Potential user resistance - It is important to understand that users might hesitate to commit to a subscription, especially if they can access similar content or services for free elsewhere. Convincing users to pay for something they're accustomed to getting for free can be a hurdle.
3. Content or service quality expectations - What's potentially more difficult is that you need to overcome that hurdle regularly. Subscribers expect consistent high-quality content or services to justify their ongoing payments. If you fail to meet these expectations you will easily cause dissatisfaction and subscription cancellations. One bad month can easily ruin your entire revenue model.
4. Market saturation and competition - All this is made even more difficult if you have to find subscribers in a crowded market. Competing subscription services can make it harder to attract and retain subscribers. Especially if your competitors have already established their online presence. Users have a plethora of choices, making it crucial for you to find a clever way to stand out from competitors.

Summary

To sum up, the subscription model brings a ton of benefits but is difficult to introduce. You need to have a unique online presence and provide a clear reason why your users should subscribe. Based on your brand and your target audience, this can be more or less difficult. But, it is never easy. If you do manage, you will not only have a reliable revenue stream, but you will also foster a sense of community and loyalty within your subscribers.

Hybrid model

Now, no rule states you have to pick one between ad revenue vs. subscription revenue. In fact, a hybrid model that combines both ad revenue and subscription revenue can be the best solution. After all, it can provide you with multiple income streams and potentially mitigate some of the weaknesses associated with each model individually. So, let's take a moment to consider some iterations of a hybrid model.

Spotify

Spotify is a great example of a hybrid model. First, you have a free version of its music streaming service supported by advertisements. Free users can listen to music for free but have to endure ads periodically between songs. Ads are not as intrusive as they can be on YouTube. But, they are still uncomfortable, especially if you are trying to listen to an entire album. Spotify is well aware of this, which is why it also offers a premium subscription service known as Spotify Premium. Subscribers have an ad-free experience with higher audio quality, offline listening, and other premium features for a monthly subscription fee. Therefore, you both have an easy barrier to entrance, as it doesn't cost anything to install Spotify.

This way, Spotify manages to attract a large user base and gather valuable user data while generating revenue through ads. At the same time, the premium subscription offers a more personalized, uninterrupted, and enhanced music streaming experience for subscribers willing to pay.

The New York Times

Another example of a successful hybrid model is The New York Times. On it, you can get free access to a limited number of articles per month on its website, supported by advertisements displayed alongside the content. Once users reach their article limit, they are prompted to subscribe to access more articles. The subscription model provides unlimited access to all articles, exclusive content, personalized newsletters, and an ad-free reading experience. Therefore, if they enjoy reading The New York Times, they have a clear incentive to subscribe.

The New York Times's hybrid model allows casual readers to access a certain number of free articles per month while monetizing through ad revenue. This gives them a glimpse at their content and the journalistic quality behind them. But, they also look to convert engaged readers into subscribers by offering a premium subscription with additional benefits and a superior reading experience.

Brand recommendations

Now, let's take a step back. In order to get revenue from content, we not only have to compare ad revenue vs. subscription revenue but also consider a hybrid model with elements of both. Even for someone with marketing experience, this can be a difficult decision to make. So, to help you out, we will now cover different brand types and what, in our view, are the best revenue models for them.

Brands suited for ad revenue

• News and informational websites
• Websites that rely on UGC
• Free games or apps
• Niche websites with relatively high traffic

In this category, we must first put brands that focus on content aggregation, news, blogs, or informational websites. Such brands often attract a wide audience seeking information. This makes them quite suitable for ad revenue due to high traffic and engagement. In a similar fashion, platforms centered on user-generated content (UGC) like social media networks tend to make the most from ad revenue. If you factor in their massive user base and frequent user engagement, it is easy to see why.

Brands offering free mobile apps or games can monetize through ads by displaying banners, videos, or interstitial ads to users during the app/game experience. With proper onboarding and a solid understanding of the user's journey, ads can even be a comfortable part of the user experience. Lastly, some websites target specific niches but still manage to have a substantial and engaged audience. Such websites can effectively monetize through targeted advertising relevant to their audience.

Brands Suited for Subscription Revenue

• Streaming services
• Saas (Software as a Service)
• Online learning
• Membership based communities

Brands that offer streaming services for movies, TV shows, music, or podcasts often adopt subscription-based models to provide exclusive, ad-free content to subscribers. A hybrid model can be an alternative. But users tend to already know what your brand can offer, so there isn't much reason to offer any free variant. Similarly, brands that offer software tools, productivity suites, or cloud services can adopt a subscription-based revenue model to provide ongoing access and updates to users for a regular fee. Here, again, users know what they are getting, which is why there is little reason to offer a free version. In most cases, you will get a trial period for your subscription.

Brands that provide educational content, courses, or certifications can opt for a subscription model to offer continuous access to a library of resources for subscribers. They need to focus on long-term plans and content quality, which is why an ad model simply wouldn't work. Lastly, we have brands that run membership-based communities, forums, or professional networks. They use subscription revenue to offer exclusive content, networking opportunities, and specialized services to members. In essence, they make being a subscriber and being a member of a community synonimus.

Brands suited for hybrid models

• Media and publishing outlets
• Gaming platforms
• E-commerce platforms

Hybrid models tend to work best if you can offer something of value to both free users and paying ones. In this regard, brands in media and publishing are a clear choice (like The New York Times). They can combine ad revenue with a hybrid model, offering free content with ads and a premium subscription for an ad-free experience and exclusive content. If you are hosting a gaming platform, you will likely have a multitude of games. As such, some of those games will be free-to-play, while others won't. As such, it only makes sense to adopt a hybrid model.

Gaming companies can adopt a hybrid model by offering free-to-play games with ads while providing premium subscriptions for ad-free gaming, exclusive in-game items, or enhanced gameplay features. Lastly, there are e-commerce brands that can benefit from a hybrid model. Some, like Shopify, are SaaS, which doesn't make them hybrid. However, not all provide the same type of service or benefit from the same content as Shopify. Those may adopt a hybrid model by offering free access to their platform with ads and introducing a premium subscription for benefits like faster shipping, exclusive deals, or ad-free browsing.

Final thoughts

Hopefully, you have a clearer idea of how to choose between ad revenue vs. subscription revenue. Your choice of revenue model should depend on factors like the nature of the brand, the content or services offered, the target audience, and your long-term goals. If it feels right, and you have a clear idea in mind, you can also experiment with different models or combinations to find the most effective revenue strategy for their specific offerings and audience. Just try to first understand what makes each model viable, and then look for the best one to implement.