How do I price website advertisements?

We want to start selling ad space on our niche website, however are unsure at what factors make up the ad price.

We will start offering ad space once we are getting 3k-5k visitors per month. Based on this monthly traffic, and considering the ads will be highly targeted based on location, how should we go about establishing pricing for these ads?

What ad sizes and formats should we use, and what other factors should we be thinking about before setting any prices? Also, what is acceptable in terms of raising prices as our traffic increases?

This answer is not meant to contrast with Genadinik who I think is spot on.

But-- there are scenarios in which doing your own advertising might make lots of sense.

This is so dependent on the nature of your website and the relationship you have with your visitors. It is depends on the demographic profile of the visitors.

For example -- if your niche site is for high net-worth accredited investors seeking information about cutting edge green technology -- well, then I have a client that would be very interested in advertising on your site.

If you your niche is very specialized and you are attracting a significant market share of a valuable market that traditional advertising has a difficult time reaching on the internet -- then you should launch your own advertising. If not -- gain traction by using something like Google advertising to develop a marketable value for your site right now.

There are obviously different types of advertising that have different value for advertisers. Brand development and awareness campaigns have a different perceived value that identification of qualified leads. where your site fits into this equation will determine its value.

If the business model of your site is to make money through advertising -- the prospective advertisers are your customers. You need to understand the product that they are seeking. And you need to understand how they are going to want to receive that product. Your site needs to be organized, marketed, and sold in a manner which connects the customer with the product they want.

What ad sizes and formats should we use, and what other factors should
we be thinking about before setting any prices? Also, what is
acceptable in terms of raising prices as our traffic increases?

Next, relative to pricing, my first recommendation is to start out as absolutely high as possible. This is for three reasons:

1) It's hard to know your prices are too low. Customers will tell you if they are too high and you can always negotiate a deal down to what they can afford or what they think the traffic is worth to them. At the beginning, every deal closed is realistically going to be a negotiation and if this is a very niche thing, it might stay that way forever.

2) From a customer perspective, it's always easier to lower prices than to raise.

3) As time goes on, presumably your inventory will be increasing and so there is a supply and demand thing going on. If you have limited high quality niche targeted inventory, you want to be selling it to the company that is willing to pay the most for it. Setting your price high then is selecting in such customers. After you have more inventory available, by implication you will probably want to start lowering your price to fill the inventory and in the end be optimizing total revenue generated by the site.

Relative to when you start to consider selling advertising, you have to have enough inventory available to even make it worth your trouble. For example, let's assuming with a decent niche targeted site you could get a $10 CPM. If you had 100,000 impressions to sell per month, this would be only $1000/month. Worth the trouble!? Don't know. You tell me. Now if this is really high quality niche stuff and you could get a $100 CPM or maybe even a $200 CPM, then that would be $20,000 month and probably well worth it. Not a lot of sites can get those kinds of rates, but they definitely exist for vertical niches.

You should not do this. If people pay for ads, they will just get AdWords. It will probably have better conversion than your traffic, and it will have no management time overhead, as there would be in dealing with small sites like yours for a bigger advertiser.

Does that make sense? It just isn't viable unfortunately.

Wait to 50k-100k monthly visitors (not page views) then the advertisers will come to you.

While I voted for Genadinik answer, I will however give you a pricing method.

1. find the keywords for which you are particularly relevant (=very first results in the SERPs)
2. find the price of this keywords while using adwords
3. estimate your click through rate
4. the price is then #visitors * CTR * average_kw_price

Sam, I have seen everything from a couple of pounds through to £50 per 1000 impressions (CPM). If this site has a very narrow focus you would be better going direct to potential advertisers. With the volume you are talking about a simple run of site sale on a monthly basis would be simplest.

Figure out what your advertisers would pay to advertise using google ads for the same impressions, then cut it by 20%.

A better solution would be not to have advertisers, but have affiliates. It's the best for you because your payout is higher and it's the best for them because unless they make money, you don't make money.