The A to Z of Online Business Models – Part 1.

As a follow-up to a previous post, in which I stressed the importance of having a defined business model before starting to invest in the production of your online business idea, I wanted to create a fairly robust source of the disparate online business models in common use in commercial-web practise.

I’m not going to call this a ‘definitive’ list, as the game rules are evolving every day, but I’m hoping that this information will serve as a thorough consideration of tried and tested business models that may fit your existing idea – or add a complementary revenue stream to your web business that maybe you hadn’t considered.

It is important to mention that many of these business models have their roots in traditional commerce models. Conceptually the model may be the same offline as online; however the mechanics and performance metrics differ in the online world.

Advertising Model

Overview: I have an audience. You pay me to promote your product/message to my audience.

(OK, I know! We all know what an advert is, however some of the other business models that will be featured are less traditional and involve more technical explanations; so for consistency I’m defining them all).

Who Pays Who?: Advertiser pays the publisher (website, ezine, application) to display their message to the source’ audience, according to the nature of the advertising product sold.

Specific Commercial Variants

CPM – (cost per thousand impressions), is commonly used to price online display advertising. Many online publishers use this as their primary business model. As a new or small publisher you may want to grow your audience and collect demographic data about your visitors to assist in a pricing benchmark.  Other variables also influence the price you can set, such as the visitor tendency to interact with advertising. Huge choice exists in the display advertising market, as publishers are free to sell their own display advertising inventory using an ad serving platform, or select an advertising network to fill inventory for them.

CPC – (cost per click), is used primarily for text- based advertisements. Google Adwords and AdSense are both examples of cost-per click advertising. In this case, the advertiser bids to have their ad shown when a user searches for a keyword that is relevant to the ad (or is reading content that contains the relevant keyword – in the case of Adsense) and pays only when a click is received, regardless of how many page impressions the advert may receive. This isn’t a business model that anyone can launch. Apart from the fact that the sponsored search market is pretty much sewn up, be aware that Yahoo! owns the original Goto/Overture patent – known as the 361 patent. Instead its best to act as a carrier of text based advertising as a search or content partner.

CPL – (cost per lead), is technically the same as cost per click, in that the advertiser pays for a ‘visit’ action; however this terminology is most often used in situations when user interest tends to have been further qualified.

CPA – (cost per acquisition), is used to describe conversion based advertising. In this case the advertiser pays only when their conversion metric has been achieved. A conversion could be a product sale or a new customer registration.  A CPA model can be a difficult model to launch a commercial website with. It may be best to operate a CPL model until statistical performance inferences can be made about your traffic conversion rates.

Affiliate Model

Overview: I have an audience and website similar to yours. You pay me for directly selling or promoting your product to my audience, almost as if the product were my own!

Who Pays Who?: Advertiser pays its affiliate partners on referred-user-completion of a specified performance metric. An affiliation can often be a long term business model, often lasting as long as the commercial lifetime of the user’ consumption of the advertiser product(s).

Specific Commercial Variants

Reseller Affiliation – an affiliate is paid a percentage share of the total revenue derived from a purchase of the advertiser product, from the affiliate website. Such share of revenue may be a one-off percentage of sale or a lifetime value share.  Many software, application and domain distributors operate reseller programmes. Reselling tends to work well for digital and download products, as physical product distribution costs can be prohibitive for re-sale.

Lead Generation – an affiliate website has a qualified mechanism for the collection and onward distribution of a lead to an advertiser. Many financial service providers offer this type of affiliate programme. If you have a content web site established in the life insurance sector, you could add an enquiry form to collect all the relevant user data, and provide this information to a life insurance provider. Such lead generation mechanism could employ either a CPL or CPA model, however an affiliated relationship by the very definition of the term, is one of commonality and similarity, therefore conversion rates tend to be much higher with affiliate lead generation as opposed to a simple CPL advertisement on a non-affiliated site. Higher commission can therefore be established as the much of the promotion and user intention is qualified by the nature of the affiliate content, as opposed to advertising content. Lead generation affiliations may also operate on a revenue share basis. As an example many Bingo game providers will pay their affiliates a percentage of the gaming revenue spent by a referred user over the lifetime of that user.

Advertising and Affiliate models are the mainstay of the commercial web; therefore require a fair bit of reference in any overview of online commercial models – so don’t be put off by the fact that we’re still on ‘A’ at the end of part 1.

In part 2. I’m going to detail Auction, Brokerage and Donation models. Please do add your comments and additional advertising or affiliate variants I may have omitted. Feel free to suggest any models from A-D that I haven’t mentioned yet!

Final Note: You will no doubt notice that I have refrained from referencing or linking to any specific advertising programme, network or affiliate offer. As theMediaFlow is impartial it wouldn’t do to direct or ‘support by association’ in this particular post. If you want my personal opinion however; Tweet me up!

Resources:

Dosh Dosh: Well written, well researched and well informed blog aimed at beginners to making money online.

Digital Enterprise: Good theoretical content, from an academic perspective.

List of Top UK Affiiate Networks, from Richard Kershaw’s Quality Nonsense Blog.

About the author

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Nichola Stott

Nichola is Founder and Director of theMediaFlow; with over 10 years experience in online marketing, over six of which in search. Nichola learned all about search at Yahoo! as head of UK search partners.

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