31 Aug 2006

Costs and Benefits of External Linking

31 Aug 2006

Often clients ask us about putting links to external sites on their pages. This is an important question that should be given a lot of consideration since a lot of money can be made or lost depending on the decision. This article seeks to help you understand how to figure out whether putting links on your pages will be a net benefit or loss.

Every link – whether a text link, image link, or banner advertisement – is a doorway. As such, every link leading away from your pages is a potential to lose users. Losing users is losing money. However, there are certain benefits to putting links to external web sites on your own pages. If there were no benefits to doing so, no web site would have external links and the World Wide Web would not be a web but rather a collection of unconnected nodes.

The most direct way to make money from putting third party links on your pages is to get paid for it. The other way is to significantly improve your users’ experience leading to elevated LTV (life time value) of those users through increased participation or lifetime length.

Broadly speaking there are two ways to address this question: through quantitative analysis or through qualitative reasoning. Of course, we can enjoy a much greater level of certainty about the outcome using quantitative analysis that hinges on the associated statistical confidence levels. If you do not have at your disposal internal personnel that can perform a multivariable regression analysis and cannot hire one, I assure you that a robust qualitative analysis can greatly inform your decision and is well worth the effort. Since a qualitative analysis lays a lot of the theoretical groundwork for this problem, we will examine it first.

Qualitative Approach

This question relates to a number of different types of websites for many kinds of scenarios.For example, a website selling goods may be considering placing contextual text advertisements on its pages. On one hand this may produce additional revenue from impressions or user clicks on the ads. On the other hand, if the ads are for competitors, you may be losing prospective sales. Therefore, you better be sure that the amount of money you make from the ads clearly outweighs the foregone revenue from lost sales.

There may be other hidden costs associated with placing contextual ads on the website in this example. One such cost may be damage done to brand or customer loyalty. Users may see these ads as a sign that you are not confident that they can find what they are looking for and thus give them an alternative. Another potential cost is that users will discover a website that suits their needs better than yours and will be less likely to come back.

The costs and benefits of placing links to external pages are unique to every situation. Whereas it can be argued that placing contextual ads on the web site in the above example may hurt brand, there are other cases where it can actually help both brand and user experience. Notable examples of this are portal sites and search engines. In many cases, the ads on their pages can actually strengthen brand. This group of web sites also illustrates the potential benefits of another kind of link – unpaid ones. In fact, search engines and portals are in the business of providing unpaid links to third party sites.

For most kinds of sites, however, providing free links to third party web sites is a serious dilemma. It is hard to tell if doing so will be a net benefit, but the fact that they are free greatly diminishes the probability that this will be a good investment. To a great extent, the success of this decision hinges on the nature of the site and the strategic implementation. For example, imagine a web site specializing in jazz CDs and records. Would it be a good idea for this site to put prominent links to Amazon.com on its pages? Almost certainly not. And although search engines are in the business of listing free links to other web pages, would Google put prominent links to Yahoo Search or Ask Search on its homepage or search results pages? Certainly not!

Therefore, it is important to carefully consider all of the ways that placing links to third party web sites may affect your web property. With each benefit and cost, make sure to ascribe rationale to your intuition because, as we saw in the above examples, the effects are unique for different scenarios.

Some benefits include:

  • Increase brand / reputation
  • Increase user lifetime
  • Increase user activity
  • Increased revenue from paid links
  • Other hidden gains (such as making new business partners, customers, etc.)

Some costs include:

  • Hurt brand / reputation
  • Decrease user life time
  • Decrease user activity
  • Other hidden costs (such as increased support costs, etc.)

Think not only of plusses and minuses, but also consider their magnitudes. Perhaps you do foresee a cost to your brand and a gain from increased revenue from paid links. You can ascribe a magnitude to each according to your intuition, and systematically figure out if there are more positive than negatives to placing links to external sites. However, it is almost always a good idea to do a proper quantitative analysis if there is a lot of potential revenue in question. That is why major internet properties have teams of economists and MBAs crunching numbers to see if they should add or remove every single link on their major pages.

Quantitative Analysis

To solve this problem quantitatively, we must figure out whether putting the links in question on your pages is a net financial gain. To do this you have to analyze the effect of including the link on each variable contributing to the associated revenue stream. This means that you must perform multivariable testing (or at least A/B testing) taking into account each of the variables outlined below. This can be done automatically using randomized version testing.The mathematical model for this scenario is as follows:

NET REVENUE = (NET REVENUE)2 – (NET REVENUE)1

(NET REVENUE)1 = (AVERAGE USER VALUE)1*(NUM USERS)1

(NET REVENUE)2 = (AVERAGE USER VALUE)2*(NUM USERS)2 + (AVERAGE CLICKS ON LINKS)*(AVERAGE PPC) + (AVERAGE IMPRESSIONS)*(AVERAGE PPI)

where

AVERAGE USER VALUE = (AVERAGE USER LIFETIME * AVERAGE USER ACTIVITY *AVERAGE VALUE GENERATED PER ACTIVITY)

which leads to

NET REVENUE = {[(AVERAGE USER LIFETIME)2 * (AVERAGE USER ACTIVITY)2 *(AVERAGE VALUE GENERATED PER ACTIVITY)2]*(NUM USERS)2 + (AVERAGE CLICKS ON LINKS)*(AVERAGE PPC) + (AVERAGE IMPRESSIONS)*(AVERAGE PPI)} – {[(AVERAGE USER LIFETIME)1* (AVERAGE USER ACTIVITY)1 *(AVERAGE VALUE GENERATED PER ACTIVITY)1]*(NUM USERS)1}

The above formula simply states that the change in net revenue from the initial state where the links have not been added (time=1) to the final state (time=2). If the predicted change in net revenue is positive, then those links added should stay. If the reverse is true, the links should go.

Notes:

  • ‘Average user lifetime’ is the total length of time that a typical user spends on your website.
  • ‘Average user activity’ is the number of times a typical user performs some action that produces revenue for you (such as clicking on PPC ads or buying something).
  • ‘Average value generated per activity’ is how much revenue a typical action produces. For example, how much does that average user spend or what is the average revenue per click of an ad.

One could write a small book about the detailed testing and analysis process involved in figuring this out, but the methods discussed above should serve as a good starting point.

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  1. Leah September 5th, 2006 8:30PM

    Good post. I think another thing that attribute external links should have is relevance to the primary page. For example, if you are looking at Amazon.com, why would there be an ad for Harley Davidson? Yet, it is hard to differentiate between having relevant links and having competitors links on the site. What do you think?

  2. Sergio September 8th, 2006 6:29PM

    Good point. Yes, I think that if you are considering addeding external links to your pages in an effort to improve the user experience (after deciding it’s worth it), at least those links should be on topic and therefore to actually add value to your pages.

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