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Best Practices

6 Business Models of the Internet

30. 06. 2009

Unlike traditional models of running a business in the bricks-and-mortar world, techniques to generating revenue online continue to evolve and be defined. After over 15 years of witnessing, working with and corroborating on various methods of online business effectiveness, I have categorized the approaches into six basic business models of the Internet.

These website business models are as follows: the Ad Units Revenue model, the Subscription Revenue model, the Commission model, the Data Distribution Revenue model, eCommerce, and Build to Sell.   Below are my descriptions of each model with some examples and advantages.

The Ad Unit Revenue Model

Displaying ads on a website is one of the most popular approaches to generating revenue. The Ad Unit Revenue model works best when the volume of traffic is high or very targeted. With this model the assumption is that visitors to a website will be attracted by the related advertisements. Both contextual and/or image based banner ads are displayed on top, beside, under, and in between articles, services, search results, or other published materials. Many of the earliest websites employed this method and it continues to be popular today.

The Subscription Revenue Model

This model generates revenue through subscriptions to a website's premium content such as articles, videos, audio, software, tools, and applications or service. The offering is information or service that cannot otherwise be easily acquired.  This model works off of economies of scale. Once a break-even point of memberships is reached, every additional subscription is strictly profit. An example of  a "pay as you go" version of this approach would be Slashdot.com. The Subscription Revenue Model is sometimes combined  with the Ad Units model.  However, if the subscription is a paid one, ads are less likely to be presented.  National newspapers or magazines in print often use this model to establish their online presence.

The Commission Model

This website business model is based on generating revenue by taking a percentage of a sale. eBay, PayPal, and Priceline.com are best examples of the Commission Model, where the item being sold is not owned by the website administrator but available via  referral. This approach relies on the advantage of offering a hassle-free way of selling personal items and products through a website that promotes and brings in the right prospects. As a pay-per-performance approach the affiliate pays commission only after a sale is made. Arbitrage is another form of this model that has to do with buying of traffic in bulk and reselling it and/or making profit using other business models. Here's a scenario of this approach in practice.  You bid on  pay-per-click keywords for a word that directs the visitor to a landing page with multiple advertisements. Instead of paying on your own for each click, in this manner you share the expense and still have fewer competitors to fight for attention. With enough clients, the re-seller of the bulk purchase can make profit on each keyword.

The Data Distribution Revenue Model

This approach is exemplified by  websites that sell  their network contacts or data about its consumers and their habits.  The Data Distribution revenue model is about providing valuable material for target marketing initiatives. Online business directories, like the Yellow Pages, and newsletter distributors like the Apple store that sells audio files, and Amazon’s Kindle are perfect examples of this approach.

eCommerce

This most recognizes model is employed by websites that sell products and services online, and are referred to as ecommerce websites.  Selling products online is a lot less expensive then selling in a traditional retail store.  Advantages of eCommerce include less overhead, more efficiency, and the ability to track visitors' experiences. This approach is a natural progression for a typical retail store that wants to expand its market reach into the online world.  Amazon is the most renowned example of this business model. Online stores will continue to grow in popularity as people become more comfortable buying through the web and as more different products and services become available.

Build to Sell

If a business model's success is measured by a track record of sales, this model could be the most valuable to a purchaser. The Build to Sell approach refers to a website's approach that builds a strong online presence with the goal of selling it to another company that can capitalize on its online value. The website's value is established either with its domain, value in its website application, content, number of members, or  high position in the search engine results, and/or all of the above.  Mostly used during the 2000 Internet boom, this model still has a lot of potential.

It's difficult to say if one approach is more effective than another in generating greater return. As with traditional business models the success equally dependents on the value of the proposition being offered. It's important to keep in mind that none of the methods are exclusively independent. Variations of the basic website business models can create levels of effectiveness that are as unique as each business - with the objective of healthy revenue growth, of course.

By Ezra Silverton

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