A firm’s revenue model describes how the firm will earn revenue, generate profits, and produce a superior return on investment. Although there are many different e-commerce revenue models that have been developed, most companies rely on one, or some combination, of the following six revenue models: advertising, sales, subscription, free/freemium, transaction fee, and affiliate.
Advertising Revenue Model
In the advertising revenue model, a Web site generates revenue by attracting a large audience of visitors who can then be exposed to advertisements. The advertising model is the most widely used revenue model in e-commerce, and arguably, without advertising revenues, the Web would be a vastly different experience from what it is now. Content on the Web everything from news to videos and opinionsis “free” to visitors because advertisers pay the production and distribution costs in return for the right to expose visitors to ads. Companies will spend an estimated $166 billion on online advertising in 2012, and an estimated $39.5 billion of that amount on online advertising (in the form of a paid message on a Web site, paid search listing, video, app, game, or other online medium, such as instant messaging). In the last five years, advertisers have increased online spending and cut outlays on traditional channels such as radio and newspapers. In 2012, online advertising will grow at 15 percent and constitute about 30 percent of all advertising in the United States. Television advertising has also expanded along with online advertising revenues.
Web sites with the largest viewership or that attract a highly specialized, differentiated viewership and are able to retain user attention (“stickiness”) are able to charge higher advertising rates. Yahoo, for instance, derives nearly all its revenue from display ads (banner ads) and to a lesser extent search engine text ads. Ninety-five percent of Google’s revenue derives from advertising, including selling keywords (AdWord), selling ad spaces (AdSense), and selling display ad spaces to advertisers (DoubleClick). Facebook will display one-third of the trillion display ads shown on all sites in 2012. Facebook’s users spend an average of over 8 hours a week on thesite, far longer than any of the other portal sites.
Advertising Revenue Model
In the advertising revenue model, a Web site generates revenue by attracting a large audience of visitors who can then be exposed to advertisements. The advertising model is the most widely used revenue model in e-commerce, and arguably, without advertising revenues, the Web would be a vastly different experience from what it is now. Content on the Web everything from news to videos and opinionsis “free” to visitors because advertisers pay the production and distribution costs in return for the right to expose visitors to ads. Companies will spend an estimated $166 billion on online advertising in 2012, and an estimated $39.5 billion of that amount on online advertising (in the form of a paid message on a Web site, paid search listing, video, app, game, or other online medium, such as instant messaging). In the last five years, advertisers have increased online spending and cut outlays on traditional channels such as radio and newspapers. In 2012, online advertising will grow at 15 percent and constitute about 30 percent of all advertising in the United States. Television advertising has also expanded along with online advertising revenues.
Web sites with the largest viewership or that attract a highly specialized, differentiated viewership and are able to retain user attention (“stickiness”) are able to charge higher advertising rates. Yahoo, for instance, derives nearly all its revenue from display ads (banner ads) and to a lesser extent search engine text ads. Ninety-five percent of Google’s revenue derives from advertising, including selling keywords (AdWord), selling ad spaces (AdSense), and selling display ad spaces to advertisers (DoubleClick). Facebook will display one-third of the trillion display ads shown on all sites in 2012. Facebook’s users spend an average of over 8 hours a week on thesite, far longer than any of the other portal sites.
Sales Revenue
ModelIn the sales revenue model, companies derive revenue by selling goods,information, or services to customers. Companies such as Amazon (which sells books, music, and other products), LLBean.com, and Gap.com, all have sales revenue models. Content providers make money by charging for downloads of entire files such as music tracks (iTunes Store) or books or for downloading music and/or video streams (Hulu.com TV shows). Apple has pioneered and strengthened the acceptance of micropayments. Micropayment systems provide content providers with a cost-effective method for processing high volumes of very small monetary transactions (anywhere from $.25 to $5.00 per transaction). The largest micropayment system on the Web is Apple’s iTunes Store, which has more than 250 million credit customers who frequently purchase individual music tracks for 99 cents. MyMISlab has a Learning Track with more detail on micropayment and other e-commerce payment systems.
Subscription Revenue Model
In the subscription revenue model, a Web site offering content or services charges a subscription fee for access to some or all of its offerings on an ongoing basis. Content providers often use this revenue model. For instance, the online version of Consumer Reports provides access to premium content, such as detailed ratings, reviews, and recommendations, only to subscribers, who have a choice of paying a $5.95 monthly subscription fee or a $26.00 annual fee. Netflix is one of the most successful subscriber sites with more that 25 million subscribers in September 2012. The Wall Street Journal has the largest online subscription newspaper with more than 1 million online subscribers. To be successful, the subscription model requires that the content be perceived as having high added value, differentiated, and not readily available elsewhere nor easily replicated. Companies successfully offering content or services online on a subscription basis include Match.com and eHarmony (dating services), Ancestry.com and Genealogy.com (genealogy research), Microsoft’s Xboxlive. com (video games), and Pandora.com (music).
Free/Freemium Revenue Model
In the free/freemium revenue model, firms offer basic services or content for free, while charging a premium for advanced or special features. For example, Google offers free applications but charges for premium services. Pandora, the subscription radio service, offers a free service with limited play time and advertising, and a premium service with unlimited play. The Flickr photo-sharing service offers free basic services for sharing photos with friends and family, and also sells a $24.95 “premium” package that provides users unlimited storage, high-definition video storage and playback, and freedom from display advertising. The idea is to attract very large audiences with free services, and then to convert some of this audience to pay a subscription for premium services. One problem with this model is converting people from being “free loaders” into paying customers. “Free” can be a powerful model for losing money.
Transaction Fee Revenue Model
In the transaction fee revenue model, a company receives a fee for enabling or executing a transaction. For example, eBay provides an online auction marketplace and receives a small transaction fee from a seller if the seller is successful in selling an item. E*Trade, an online stockbroker, receives transaction fees each time it executes a stock transaction on behalf of a customer. The transaction revenue model enjoys wide acceptance in part because the true cost of using the platform is not immediately apparent to the user.
Affiliate Revenue Model
In the affiliate revenue model, Web sites (called “affiliate Web sites”) send visitors to other Web sites in return for a referral fee or percentage of the revenue from any resulting sales. For example, MyPoints makes money by connecting companies to potential customers by offering special deals to its members. When members take advantage of an offer and make a purchase, they earn “points” they can redeem for free products and services, and MyPoints receives a referral fee. Community feedback sites such as Epinions and Yelp receive much of their revenue from steering potential customers to Web sites where they make a purchase. Amazon uses affiliates who steer business to the Amazon Web site by placing the Amazon logo on their blogs. Personal blogs often contain display ads as a part of affiliate programs. Some bloggers are paid directly by manufacturers, or receive free products, for speaking highly of products and providing links to sales channels.
Subscription Revenue Model
In the subscription revenue model, a Web site offering content or services charges a subscription fee for access to some or all of its offerings on an ongoing basis. Content providers often use this revenue model. For instance, the online version of Consumer Reports provides access to premium content, such as detailed ratings, reviews, and recommendations, only to subscribers, who have a choice of paying a $5.95 monthly subscription fee or a $26.00 annual fee. Netflix is one of the most successful subscriber sites with more that 25 million subscribers in September 2012. The Wall Street Journal has the largest online subscription newspaper with more than 1 million online subscribers. To be successful, the subscription model requires that the content be perceived as having high added value, differentiated, and not readily available elsewhere nor easily replicated. Companies successfully offering content or services online on a subscription basis include Match.com and eHarmony (dating services), Ancestry.com and Genealogy.com (genealogy research), Microsoft’s Xboxlive. com (video games), and Pandora.com (music).
Free/Freemium Revenue Model
In the free/freemium revenue model, firms offer basic services or content for free, while charging a premium for advanced or special features. For example, Google offers free applications but charges for premium services. Pandora, the subscription radio service, offers a free service with limited play time and advertising, and a premium service with unlimited play. The Flickr photo-sharing service offers free basic services for sharing photos with friends and family, and also sells a $24.95 “premium” package that provides users unlimited storage, high-definition video storage and playback, and freedom from display advertising. The idea is to attract very large audiences with free services, and then to convert some of this audience to pay a subscription for premium services. One problem with this model is converting people from being “free loaders” into paying customers. “Free” can be a powerful model for losing money.
Transaction Fee Revenue Model
In the transaction fee revenue model, a company receives a fee for enabling or executing a transaction. For example, eBay provides an online auction marketplace and receives a small transaction fee from a seller if the seller is successful in selling an item. E*Trade, an online stockbroker, receives transaction fees each time it executes a stock transaction on behalf of a customer. The transaction revenue model enjoys wide acceptance in part because the true cost of using the platform is not immediately apparent to the user.
Affiliate Revenue Model
In the affiliate revenue model, Web sites (called “affiliate Web sites”) send visitors to other Web sites in return for a referral fee or percentage of the revenue from any resulting sales. For example, MyPoints makes money by connecting companies to potential customers by offering special deals to its members. When members take advantage of an offer and make a purchase, they earn “points” they can redeem for free products and services, and MyPoints receives a referral fee. Community feedback sites such as Epinions and Yelp receive much of their revenue from steering potential customers to Web sites where they make a purchase. Amazon uses affiliates who steer business to the Amazon Web site by placing the Amazon logo on their blogs. Personal blogs often contain display ads as a part of affiliate programs. Some bloggers are paid directly by manufacturers, or receive free products, for speaking highly of products and providing links to sales channels.
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