Perplexity - Breaking the CPM Barrier
Perplexity announced they are moving into ads.
Last week, Perplexity announced they were getting into the ads business. This isn't surprising - I've long argued that subscription in search has a limited TAM. The willingness to pay isn't high enough for a service that consumers are already getting for free.
What's particularly interesting is that Perplexity is gunning for a $50/CPM (CPM = cost per 1k impression). That's about 3-5x higher than the avg. industry standard for advertising platforms. For example, Facebook's avg. CPM is around $10-15, and even the industry leader, Google, operates below $40.
But if this works out for them, it could be a big opportunity:
1. $50/CPM could be realistic because of Perplexity's user base: 8 of 10 users have undergraduate degrees, and 65% are high-income white-collar professionals. This user base is not only more likely to engage with high-value ads but also to convert at a higher rate. Premium prices for premium users - make sense.
2. Perplexity’s user base also skews on the younger side (under 34). These users have not reached peak earnings level yet. Thus, over time, the propensity and capacity to purchase from their users should grow faster than the avg.
3. Perplexity's avg. visit duration is reported to be in the 20-25 min/day range. That's already highest in industry and more than Youtube (20 min), Google (10 min), and Facebook (11 min). Longer engagement means more opportunities for ad exposure and a higher likelihood that users will interact with the ads.
4. Theoretically, Perplexity’s answer-first ads should be more relevant than pure link-based advertising since it will be embedded closer to the answer. This should result in a higher conversion rate and hence CPM.
5. If we do some quick back-of-the-envelope math, this could already be a $1b revenue opportunity for them next year:
-- Perplexity currently serves 250m queries/month, growing at ~10% m/m. If we assume this growth continues, they’ll be at ~600m queries mid next year. Let’s use that as the midpoint/average monthly query for next year.
-- Google currently serves 166b queries/month. So Perplexity will be at around 0.35% of Google’s search queries next year. (0.6b/166b).
-- Google’s ad revenue is around $200b/year. So if we apply a simple ratio, Perplexity’s ad revenue would be $700m ($0.35% x $200b).
-- But remember that Perplexity’s is targeting a higher CPM than Google, so if we apply a premium based on the difference between Perplexity’s targeted CPM and Google’s current CPM, we would get to around $1b revenue ($700m x 130%).
The opportunity is undoubtedly significant. However, venturing into the world of advertising means stepping into the realm of Google, Meta, and others. Now that the squirrel monkey has entered the gorilla's cage, the question is: can it maintain its agility and continue to evolve, or will it be crushed by the sheer dominance of the incumbent primates? Only history will tell, but if Perplexity manages to stick around, the sky’s the limit.