This week, I’m sitting in one of California’s nicest neighbourhoods with some of the smartest people I’ve ever met in the field of web marketing. Inevitably, the discussion turns from analytics and code validation to profit. How do you make profit on a website and, more importantly, how can anyone do it?

Understanding Profit

First, if you own a website it is vital to understand what is meant by profit. It’s the remainder when you subtract all of your costs from all of your revenue. That sounds fairly easy, night? It should be, but more companies than you can imagine forget to do that basic calculation.

Profit = Revenue – Costs

If you look at that simple equation, it’s a wonder how anybody could get it wrong. The truth is, the web is still such a new medium that most people have never stopped to think of it this way, even though it’s the basic profit equation used by every bank, business and professional in the world.

How to Generate Revenue on a Website

At its core, there are three models for generating profit on a website. Let’s look at an advertising model.

Much like you’ll find here on thisismyurl.com, google.com, facebook.com and a million other websites, there should be advertising on the site. Sometimes, these ads are managed by the website owners or they can be managed by a firm. Either way, they generate revenue for a firm. Estimating the amount of profit for a website through advertising is exceptionally easy.

If you’re using Google AdWords, you need to know how much your ads are worth using the Google Keyword Tool. Next, you’ll need to know your commission for ads (found in your AdSense account) and the estimated click-through rate for ads on your personal website. With this information, you can complete the first half of another equation called the Break Even equation.

Revenue = Costs

This equation is simple. It states that the break even point (when you’re neither losing or making money) is when your website revenue is equal to the costs of running it. So, your equation looks like this:

Revenue = Visitors * Click Through Rate * Percentage Payout * Rate per Ad

Let’s fill in some of those numbers using data for an undisclosed website. First, we don’t know the number of visitors so we’ll call that X, but we do know the click-through rate is 2.05% and the payout is 61.5%. Using AdWords tools we also know the average cost per ad is $1.84, so it looks like this:

Revenue = X * 0.0205 * 0.615 * 1.84 = Costs
Revenue = 0.0231978(x)

By multiplying our known variables, we’ve created a number which represents the value per page load ($0.02) for our website, now we need to know our costs. With that number in mind, we know our website is worth $20 per 1,000 visitors in advertising revenue, but what we need to calculate now is the cost of that website.

Calculating the Cost of a Website

For this, we will need to make some assumptions, for example, we need to assume your time is worth something.

Let’s say you’re worth $20 an hour as a reasonable wage. This represents the cost of paying somebody to maintain the website and of course build a decent one to begin with. For estimating’s sake, let’s assume you paid $5,000 to build the site and need to put in one hour for every 5,000 visitors to the site.

Let’s also assume you have a hosting account with Bluehost and pay $7 a month for hosting.

Finally, let’s assume you’re going to use something like Facebook to generate traffic to your website, so you have a low cost of acquisition. With Facebook, you can use their advertising tool to determine your cost per click or cost to display 1,000 ads. Let’s say that I choose a cost per click of $0.10 and using Compete.com data, I know the average person on the site loads 10 pages.

Now, your equation will look like this:

Cost = Cost to Build the Website + Cost to Host the Site + (Cost to Maintain the Site + Advertising)
Cost = 5000 + (7*12) + (20 * (x/5000) + (.1/10 * x )
Cost = 5084 + .01(x) + .01(x)
Cost = 5084 + .02(x)

Since we know that our break even point is when Revenue is equal to Cost, we can now do this:

Revenue = Cost
0.0231978(x) = 5084 + 0.02(x)
0.0231978(x) – 0.02(x) = 5084
0.0031978(x) = 5084
x = 1,589,843

This means that to break even (neither profit or loss), this website would need to have 1,589,843 page views with an average page view of 10 per visit. We can calculate that the site would require 158,984 visitors on the website. This would cost $36,880 and have a revenue of $36,880, with each page view generating $0.0031978 in profit.