In a surprising revelation, Meesho’s Chief Financial Officer (CFO) Dhiresh Bansal disclosed that the majority of their revenue of ₹3,000 crore in FY 22 came from ad sales. This revelation raises an intriguing question: Can a company scale its revenue without ultimately selling advertising space on its platform? Let’s explore the examples of some other companies in this context.
Firstly, let’s consider Uber, which allows advertising in various forms such as in-cab, on-cab, in-app, during drives, and even during food deliveries. Uber reported $500 million in ad sales for CY 22, with ads contributing approximately 60% gross margin, translating to $300 million in gross margin from ads alone. Uber’s CEO has stated that their goal is to double ad sales to $1 billion for CY 23.
Similarly, Instacart witnessed a significant growth in ad sales, amounting to $740 million, which accounted for approximately 30% of their total sales in CY 22. This figure more than doubled from the previous year when ad sales constituted only 20% of their total sales.
Amazon, a giant in the e-commerce industry, generated $11.6 billion in ad sales in a single quarter of Q4 CY 22. Although this accounted for around 7% of their total sales, considering Amazon’s gross margin of approximately 20% in e-commerce, ads likely contributed around 20% to their overall margin.
This pattern reveals that once a platform gains significant user attention, the contribution of ad sales to the company’s overall margin tends to increase over time. For instance, ads account for around 5% of Uber’s overall margins and about 20% for Amazon.
The profitability of an ads business lies not only in the gross margin but also in the net margin, as ad teams typically operate with lean structures. Indian growth stage businesses like CRED, PhonePe, and Paytm have ample opportunities to develop their ads businesses, and they have already begun doing so.
Looking ahead, retail media networks and alternative channels will likely continue to capture audiences, posing a potential challenge to established players like Google and Meta. Despite a founder’s desire for an ad-free world, ads are expected to remain due to their significant revenue potential, although the CFOs of companies may face sleepless nights contemplating the implications.
