EB/U4 Topic 1 Application & Strategies Business Model & Revenue Model Over Internet
A business model describes the rationale of how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts. The process of business model construction is part of business strategy.
The Internet has given rise to new kinds of business models while at the same time reinventing tried-and-true models. There are Internet business models that result in passive income and those that work through active income (exchanging hours for dollars).
Today, let’s discuss five of the most popular and successful Internet business models:-
- Social Media Model
Of course Facebook, with over 800 million users, is the most successful. But there’s also LinkedIn, Twitter, Google Plus, Pinterest, and many more. But how do these companies generate revenue?
This social media business model works by offering a free online service (in this case the service is social networking) and then selling targeted ads to the users. The users do not pay anything to use the service. As Facebook’s home page reads, “It’s free and it always will be.”
The reason advertising is effective on social networks is because companies can buy ads on a pay-per-click basis (similar to Google’s PPC ads). And these ads can be laser focused to a very specific target market. Effectively, it’s the billboard business model version two.
- Affiliate Model
The affiliate business model is another very successful Internet business model in use today.
Here’s how it works:
A business sets up an “affiliate program” where it offers a financial incentive to affiliates for each visitor or customer brought about by the affiliate’s own marketing efforts. Typically the affiliate is given a unique “affiliate link” which is tracked by the business.
Every time a sale is made as a result of this process the affiliate receives a percentage of the sale. This Internet business model is well-suited for trusted sites that have large followings. A good example is Pat Flynn from Smart Passive Income.
- Subscription Model
Websites that use the subscription business model require users to pay a fee (typically monthly or yearly) to access a service or product. With over 24 million subscribers, Netflix is one the most successful companies that use the subscription business model. In 2011 Netflix generated $876 million.
- Merchant Model
The Amazon…oh excuse me, I mean the merchant business model is one of the most profitable Internet business models. The merchant model is a business model that goes back thousands of years. But the Internet has provided a tremendous opportunity for merchants to grow at an almost unbelievable rate.
In the merchant model a merchant simply sells products directly to buyers. It could be clothes, CDs, or cars but the concept is the same. Again this business model is not new but savvy business owners have figured out how to leverage the buying power of customers on the Internet.
- Advertising Model
Again we have another old school business model that’s been applied to the Internet. The advertising business model is an extension of the traditional media broadcast model. But now the “media” company is a website (i.e. Google, Yahoo!). And just like in radio or TV the “media” company provides viewers, or users, with free content and services.
The more people the media company has watching them (or using their service) the more money they can charge for targeted advertising, or hire targeted advertising companies to market for them.. Google has the market on the Internet advertising mod.
The term “business strategy” describes the methods a business uses achieve its mission and objectives. A business’ mission encompasses its overall purpose, core values and long-term goals. A grocery store might have the mission of making profit while providing the best food to customers, minimizing its impact on the environment and promoting strength in the local economy. The company’s strategy might involve buying products from local food producers, encouraging customers to bring their own grocery bags, advertising in local newspapers and buying recycled product packaging materials. A business’ strategy includes how it deals with the opportunities and threats it faces.
APPLICATION OF REVENUE MODEL OVER INTERNET
In business, revenue typically consists of the total amount of money received by the company for goods sold or services provided during a certain time period. Therefore, revenue models are a part of the business model.Many online companies generate revenues from multiple income streams such as advertising, subscription, affiliate marketing etc. Online models not only sell goods or services but also contacts (e.g. banner) and information (e.g. user-data).
Five primary revenue models are described below. Since there are possibilities of multiple variations, many companies do not use one single revenue model. They combine for example subscription fees with advertising and/or sales.
(1) Advertising Revenue Model
Typically, fees are generated from advertisers in exchange for advertisments, which is ultimately the classic principal among the revenue models besides sales. Even if representatives of major media companies complain about earning less money with online advertising than with advertising in print or TV, the figures indicate steadily rising revenues.
The advertising revenue model is based on contacts making it one of the indirect sources of revenue. The conventional version is display-marketing – for example wallpaper, super banner, rectangle, skyscraper – which is paid according to traffic (invoice per CPC/cost-per-click or CPX/cost-per-action). The main online advertising variations are besides display-marketing, affiliate-marketing (advertising on many websites, CPX) and search-engine-marketing (CPC). Special models are e-mail-marketing and social-media-marketing. For advertisers with a lower budget for example the New York Times created a self-booking-tool for display-ads on a CPM(Cost-per-mille)-basis. And there are still rising new opportunities.
- Google (e.g. AdWords and AdSense)
- New York Times (Marketing)
(2) Subscription Revenue Model
Users are charged a periodic (daily, monthly or annual) fee to subscribe to a service. Many sites combine free content with premium membership, i.e. subscriber- or member-only content. Subscription fees do not depend on transactions. Subscribers use the content as long and often as they want.)
Publishers and content services, e.g. newspapers, magazines, tv channels – they provide text, audio or video content to users who subscribe for a fee to get access to the service or to download the new issue: New York Times, Spiegel Online, Zattoo, Netflix.
(3) Transaction Fee Revenue Model
A company receives commissions based on volume for enabling or executing transactions.7) The revenue is generated through transaction fees by the customer paying a fee for a transaction to the operator of a platform. The company is a market place operator providing the customer with a platform to place his transactions. During this process the customer may be presented as a buyer as well as a seller. To actively participate in this e-market, customers must register, so both parties of a transaction taking place are identified. From a business perspective, the offer is determined by others as customers offer their goods online and are acting as sellers. The amount of the transaction fee can be both – fixed and percentage calculated.
(4) Sales Revenue Model
Wholesalers and retailers of goods and services sell their products online. The main benefits for the customer are the convenience, time savings, fast information etc. The prices are often more competitive. In terms of online sales there are different models such as market places as common entry points for various products from multiple vendors.
- The shops of single companies, sometimes based on web-catalogs (combines mail, online and telephone-ordering): Otto
- E-tailors operating solely over the web: Amazon.
(5) Affiliate Revenue Model
The affiliate program is an online distribution solution which is based on the principle of commission. Merchants advertise and sell their products and services through links to partner-websites. It is a pay-for-performance model: Commissions are only paid for actual revenue or measurable success.8) An affiliate-link includes a code, which identifies the affiliate. That’s how clicks, leads or sales are tracked. The affiliate therefore acts as the interface between merchants and customers. This model leads to a win-win situation: the merchants sell their products or services and the affiliates get their commissions. Variations include banner exchange, pay-per-click and revenue sharing programs. The affiliate model is well-suited for the web and therefore very popular.