Choosing your online revenue model
We know that starting an online business can allow for a faster launch than traditional bricks and mortar businesses.
However, while online businesses can be quick to create their presence, one area that hasn’t historically received as much focus as it should is revenue and determining the right revenue model for a new online business.
Basic types of businesses
There are generally five types of online business:
1. Merchant – who buys products and then sells them at a higher price, like Amazon and iTunes.
2. Market operators – who bring buyers and sellers together but don’t take part in the transaction themselves. eBay is one well-known example.
3. Application providers – who provide software as a service, like Gmail or Xero.
4. Utilities – that provide a service which is reliant on other applications to deliver their value. PayPal is an example where on their own they provide little value, but teamed up with sites, shoppers want to buy from and the convenience and security of PayPal is appreciated by the consumer.
5. Publishers and broadcasters – who distribute content, some at a rapid rate like YouTube where 72 hours of video are uploaded every minute.
Historically, marketing to increase clicks, views and impressions or growth of an online community of followers, has been the driving force of online business.
Today, attention is turning to the more traditional focus on activities that drive revenue and some experts in online business performance are starting to advocate for performance tracking based on average revenue per user, rather than the traditional marketing and advertising measures just mentioned.
After all, businesses including those online still need cash to survive and grow, so gone are the days of an online start-up taking its time to turn a dollar.
Generating revenue and returning profits are the primary focus of start-ups and for those operating online the options for doing so are numerous:
Typically used by merchants to add their own margin to the price the consumer pays to acquire the goods and services the merchant is on-selling.
Used by online market places to charge a percentage fee on each transaction.
Often used by application providers, utilities and publishers to charge a recurring fee for ongoing access to a service. Some sites such as LinkedIn will offer their members the option of free basic access or premium access with additional features as a subscription cost.
Used by publishers and broadcasters with copyrighted material to licence access to it to their customers, such as training materials for business or education institutions.
Pay per use
Utilities, application providers, publishers and broadcasters charge a transaction fee for each use of a service or to download premium content.
This is used to deliver products or services for free or at a minimal charge in return for exposure to paid advertisements on the website. This model requires a high volume of traffic though.
Social media sites such as Facebook, LinkedIn, Twitter and Pintrest are very effective at selling targeted advertising space in this manner, which best suits publishers and broadcasters, market operators and utilities.
Are another more targeted form of advertising used by publishers and broadcasters. Advertisers underwrite the cost of delivering premium content or extended access to content, using third party advertising company tools that allow advertisements to be matched to the content.
Access is only provided if the advertisement is viewed. This direct engagement with the advertisement allows the site to charge higher advertising rates, although they are generally shared with the third party advertising company.
Third party sponsorship
Is used by application providers, publishers and broadcasters to offer exposure through a relevant channel, such as a bank sponsoring and gaining exposure in the Money section of a news site, in exchange for a fixed fee arrangement or a contra-deal where two sites exchange advertising space to each other.
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Merchants, application providers and utilities sell the products and services of other companies through their site and generate income by charging a commission on the product purchase price. For example, Amazon pay their affiliates 5-10% of the cover price of books displayed on their website.
Subscriber data access
Where customers have given their permission, the contact details gathered by these sites can be valuable to third parties who are willing to pay the site owner to email and advertise to their customer-base.
Are another potentially substantial form of revenue, but are often only used by social media, community based, or news sites where members donate funds to cover the cost of running the site.
Here are my top five tips for adopting the right revenue model for your online start-up:
1. Think about your revenue model during your business planning stages
When considering your target markets think about their current purchasing habits, what’s important to them, what they will pay for and how they want to pay for it.
While there may be demand for your product or service, their willingness to purchase and what they are willing to pay may vary greatly from what you can expect. This makes it important to research and understand all your options and consider how they suit your intended business.
2. Test and gather feedback
While planning is important, you don’t really know how customers will respond until you start interacting with them and the best way to do this is to soft launch, test, gather feedback and refine things.
During planning you might identify two or more revenue models that could suit your business. Test them to match the best ones for each customer segment and which options are more profitable.
3. Don’t lock yourself into just one model
You don’t have to choose one revenue model and just run with that. Multiple models might allow you to gain greater reach across different customer segments or allow you to capture customers you wouldn’t have otherwise.
Some customers might not want to initially be locked into a commitment, but will commit if given the chance to experience interacting with you at low or no cost for their first transaction.
4. Get one model working really well first
Start-ups have a lot on their plate and you can’t try to be everything to everyone up front. There are a lot of revenue model options outlined above and you could see the potential to maximize your revenue using multiple models.
The best approach is to test, get one model working really well, and when it’s providing you with a nice steady income stream, then turn your attention to testing and implementing others.
5. Keep tracking your results
Customer preferences and habits change over time and as they experience different online businesses and technology evolves, you need to keep up to date and remain profitable.
Each time you change a process, add a new product or service, or try a new sales and marketing activity, monitor the impact it’s having on your business and identify any early warning signs or changes that might signal an opportunity for you to take advantage of.
Marc Peskett is a partner of MPR Group, a Melbourne based firm that specialises in providing business advisory, tax, outsourced accounting and grants and funding services, to fast growing technology and innovation businesses.
You can follow Marc on Twitter @mpeskett