Business Models: how does a site make money? (lecture 5)

Written by: Jonathan Briggs

October 31, 2004 [3943 views]

Despite the end of the dotcom boom many online companies have become successful at making money and not simply by offering products to sell. A whole range of “business models” are operating and any company that wants to improve its revenues needs to consider whether to adjust what is doing online to take advantage of some of them.

Where is the money?

You need to look beyond the surface of most sites to see how companies actually make their money. Why for example are eBay and Google two of the most profitable businesses online?

• Don’t confuse visitors with customers; a customer is a visitor who buys something
• Where does the content come from? Who is paying for it?
• What services does the site offer? Who pays to use these?
• Is there a valuable technical system that is being sold to others?
• Can content be sold or syndicated to others? In return for what?
• Does the site act as a broker; buying and selling and making a margin?
• Who else is involved in any transaction? How are they being remunerated?
• Who owns the other pieces of the transaction?

Attention is important

Websites like TV, radio and newspapers can monetise their audiences. Commercial TV does this by selling advertising; offering to share the attention of the audience with the advertiser. The advertiser pays in the hope of attracting new customers or of switching customers from competitors. It is hard to measure the success of traditional advertising models except for direct marketing where “conversion rates” vary between 0.5% and 5% depending on how successfully the campaign is “targeted.” Previous customers tend to convert at a somewhat higher percentage than “cold prospects”.

Online advertising hopes to work just like other forms of advertising but offers to be much more traceable. Early “banners and buttons” paid on a CPM (cost per 1000 impressions) have been augmented by Pay-per-click (PPC) or Pay-per-result (commission) models.

It is now common for new online businesses to have to spend money on advertising before they become viable destinations for advertising themselves.

Advertisers want two things: relevant target prospects and responses. How do we ensure that the people who are looking at the ad might want to buy what is on offer? How do we make them respond?

Targeting

• Only advertise on sites where the audience matches the target profile: age, location, gender, interests. Marketers have devised all sorts of models for categorising people with all sorts of PR friendly names: empty nesters, yuppies, cash rich-time poor, GenX, Boomers, etc
• Need to know both the target demographics and the demographics of the proposed site. How could the web help us do this?
• Well targeted campaigns are generally more expensive than general campaigns. Think about why this should be the case?

Making prospects respond

• A full discussion of advertising is beyond this lecture but here are a few pointers:
• Make the offer very clear – spell out the offer
• Demonstrate the benefits of the offer: the brightest, whitest, newest or the best
• Encourage prospects to explore the offer; click to compare with your current supplier
• Run a competition
• Offer something for free (expertise, discount, shipping)

Other business models

1. Fee for facilitating a transaction between buyer and sell
2. Introduction fee; clients or suppliers pay to be introduced to each other (dating)
3. Fee for aggregating demand; helping a group of customers buy together and achieve a discount
4. Subscriptions for content or service
5. Pay per view; allow customers to download music, software, images, documents
6. Space rental; allow other businesses to rent space in your directory, advertising network, auction, market place
7. Data collection and sale; collect data on your visitors and sell it to third parties
8. Pyramid selling (multi-level marketing); recruit other people to sell your product for less than it would cost you to sell it and incentivise them to recruit other people to sell for less than they could. Dodgy and sometimes illegal.

How to make money on your site?

1. Make a profit: Sell things for more than you buy them for
2. Design your business to make a profit; it is rarely accidental
3. Offer content and services that are wanted/needed by a niche audience
4. Promote your site properly
5. Design your site to make it easy to promote
6. Understand who you can charge; don’t assume it is the visitor
7. Develop software or patents that you can sell or licence to other sites
8. Join an advertising network that pays you on a pay-per-click basis
9. Make your service easier than the alternatives; particularly the option for the customer to do it themselves (thin eBay).
10. Design an affiliate scheme that allows other people to help you sell your products and services
11. Own the customer; remember that the cost of acquiring new customers is usually higher than encouraging existing customers to buy again
12. Make it easy for your customers to recruit others (member get member, tell a friend, affiliate schemes)
13. Find free content and services that add value to your site; understand why they are being offered for free
14. Do nothing yourself if it is cheaper to get someone else to do it

Common mistakes

1. Poorly defined business model
2. Spend too much on advertising without any way of recovering the outlay
3. Competing with other sites solely on price
4. Insufficient promotion; particularly ignoring the unique marketing aspects of the Internet
5. Investing too little to start the project; an unreliable, cheap looking site with poor customer service is unlikely to generate a fortune
6. Lack of competitor research
7. Lack of focus

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