Eli5: how do ads generate revenue?
In: 2
Company pays to have its ads shown. There are usually intermediaries, like the ad agency that works with the company to make the ad, and ad distributors like Google, Facebook and Microsoft.
A company wants to get their product seen, so they will pay a platform (like a TV network, a website, etc) to show their product. Take a TV show like The Price Is Right. That entire 60 minute show is an ad. All of the prizes are supplied by the manufacturer and the announcer describes them all in detail. Not only that, but they show their prices as part of the games.
For traditional ads, how they pay out needs to be agreed upon by both sides. If I want to place an ad on TV, I will pay a lot more money to be played during The Superbowl (which will have a lot more viewers) than I would to have my ad played during a rerun of Alf.
On YouTube, if you’re being forced to watch a 15 second ad with no skips, the advertiser must pay youtube more compared to an ad that gets skipped by the viewer (and skipped ads pass no ad revenue onto the channel owner).
Maybe you are asking why companies pay for ads. They pay because ads are proven money makers.
You may think you don’t respond to ads, but just look around at all the branded merchandise you buy, probably at a premium over generic or lesser-known versions of the same thing. Okay, maybe you can rightly argue that the branded product is a better product, but how would you know that if the branded product hadn’t advertised?
As the saying goes, the secret to success in business is early to bed, early to rise, work like hell and advertise.
EDIT: reading the other replies, I’m inclined to think OP meant “how do they generate revenue for the platform that shows it” rather than for the company that makes it. I will, however, leave my answer just in case that’s what OP meant.
They don’t, not directly at least. The purpose of ads is to get people to buy your product or use your service. If that happens, your company makes money, and that is the ad generating revenue.
The exact amount of revenue generated by an ad can’t be accurately measured or even clearly defined. If I see your ad and buy your soft drink, you don’t know if that’s why I bought it unless I tell you (which is why many companies have a “how did you hear about us” question on their websites, for example). If my friend sees me drinking it and tries it because he thinks he may also like it but he’s never seen your ad, that revenue also came from the ad, albeit indirectly.
You have a small business. Someone tells you that a $1000 ad on local TV will increase your profits for the month by at least $2000. You try it, and it works. You earned two extra dollars for each one you spent.
So you keep doing it.
Same concept applies to other kinds of advertising, though there are many complex variations.
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