Having worked in the Internet industry for the last 10 years, I’m still amazed that so few people understand how online businesses generate revenue. To be clear, the online businesses to which I’m referring are pure online businesses that do not directly provide products or services outside of the information or applications on their websites. These types of businesses generate billions of dollars in revenue every year, so it is important for every businessperson to at least understand the fundamentals of how these businesses work.
Online businesses employ four primary revenue models: subscriptions, advertising, affiliate marketing and lead generation. No technical or programming knowledge is required to understand these models, so anyone reading this article should walk away with a basic understanding of online revenue generation.
Subscriptions
Subscriptions can apply to a variety of types of businesses, but because consumers expect nearly everything online to be completely free, this is one of the most difficult models to execute. However, if you can successfully build a profitable, online subscription business, it is the safest, most stable revenue source. An online subscription revenue model is most commonly used by websites providing high-value, tightly guarded and regularly changing information. Many newspapers are attempting to execute this model, but, because most of the information they cover is available on multiple other sites for free, they are fighting a steep, uphill battle. Businesses that have executed this strategy more successfully provide extremely unique content focused on a well-defined niche. A good example of this is InsideTexas.com, which offers to their premium subscribers inside information about the University of Texas athletics, much of which is not available anywhere else.
Advertising
Advertising is the most well known form of monetization for online businesses, but this business model only makes sense if you expect to generate hundreds of thousands of visitors and page views AND other online business models aren’t available. The reason for this should be fairly obvious to anyone that has spent time online. People pay almost no attention to online ads; therefore businesses won’t pay very much to show them on your site. That said, because people pay a tiny amount of attention to online ads, businesses will pay a tiny amount on a per-view basis to be shown. Most online advertising deals are made on a CPM (cost per thousand views) rate. A good CPM rate for an online advertisement ranges between $2 and $4/CPM. If you have an average of 3 ads per page on your site, and you receive 100,000 page views per month, you would generate $600 and $1,200/ month.
A smaller percentage of advertising arrangements are done on a CPC (cost per click) basis rather than a CPM rate (Google’s Adsense being the most popular of these). Because a clicked ad is considered much more valuable than a viewed ad, these rates are dramatically higher, but still only a few cents per click. If you have relevant, well-placed CPC ads on your site, you might be able to generate more revenue per visitor than a CPM ad, but it will still require a huge amount of traffic to generate a meaningful amount of revenue. Ultimately, the biggest challenge to online advertising is proving to advertisers that they are getting a good return on their investment. Companies like Facebook and Twitter currently rely on advertising for their revenue, and this is the key challenge for their businesses.
Affiliate Marketing
Affiliate marketing is the least-known online revenue model, but for the right websites and markets, it can be the most valuable. Affiliate marketing is the Internet’s version of referral agreements. One of the most common and profitable examples of affiliate marketing websites are coupon sites. In order to increase sales, just like their offline counterparts, online retailers distribute coupons in order to encourage shoppers to purchase their products. Coupon websites enter into affiliate agreements with many (anywhere from dozens to thousands) of these retailers, and, in return for displaying those offers prominently on their websites, the coupon website owners receive a referral payment for purchases made using their coupons.
There are many different types of sites that use this revenue model (comparison websites, niche blogs, monthly newsletters, etc), but the distinguishing characteristic of an affiliate agreement is that the publisher is paid only when a person they referred to an online retailer actually signs up for or purchases a product or service. Because of this, the retailers are willing to pay these publishers top dollar per transaction. Amounts are usually based on a percentage of the purchase price or new customer value.
Lead Generation
Lead generation is one of the most popular and successful methods for generating revenue with an online business. LendingTree.com is a well-known lead generation website that, in its heyday, ran commercials that said, “When banks compete, you win.” This is essentially what most lead generation sites do: They provide you with a value proposition that incentivizes you to give them your information (in LendingTree’s case, multiple competing quotes for your loan), which they in turn sell to service providers with whom they’ve negotiated lead payment terms.
Because lead generation requires considerable administration — from signing up qualified lead buyers, to tracking these leads, to handling lead payments — some businesses have formed to focus exclusively on managing the lead generation process and partnering with other businesses that generate traffic on their sites. It’s a multibillion-dollar industry with lots of opportunity and new, smart businesspeople carving out new niches every day.
Take Away
- Online businesses employ four main revenue models: subscriptions, advertising, affiliate marketing and lead generation
- Subscriptions can be a difficult model to execute because consumers expect nearly everything online to be free
- Online ad deals are often made in terms of CPM (cost per thousand views) or CPC (cost per click)
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About the Author
This article was produced by TexasEnterprise. TexasEnterprise was set up to share the business and public policy knowledge created at The University of Texas at Austin with Texas and with the world. Texas Enterprise stories will draw on research from all over the university. We’ll interview researchers, sift through findings, and publish practical insights and wisdom that are relevant to business professionals. see more.
