Revenue Model Options for Digital Business
Everyone has a good idea, but can everyone make money from that idea? We have compiled these articles to give you some insight into turning your digital business into a money-making venture.
Revenue model basics
To avoid any misinterpretations, let’s quickly define the main terms related to forming a business strategy. First, a business model (BM) is a broad term outlining everything concerning the main aspects of the business, all of which are contained in the answers to the following questions.
- What value will we create?
- How will we deliver it?
- How will we bring in revenue?
- How will we earn profit?
Numerous business models can’t be classified in a single list because each part is highly individual to the industry, type of product/service, audience, or profitability. Instead, business models are often depicted strategically on a business model canvas. This is a compound representation of all the key elements of a BM.
So, in a nutshell, the BM describes how a business will work from value generation. To describe how the company generates income, revenue models are used.
A revenue model is a part of the business model that explains different mechanisms of income generation and its sources. This is a high-level answer to the question that asks how we will generate revenue from the value we bring to a certain customer group.
The simplest example of a revenue model is a high-traffic blog that places ads to earn profit. Web resources that generate content for the public, e.g. news (value), will use its traffic (audience) to place ads. The ads, in turn, will generate revenue that a website will use to cover its maintenance costs and staff salaries, leaving the profit.
A revenue model manages a company’s revenue streams, predicts income, and modifies revenue strategy. The revenue itself is one of the main KPIs for a business. Measuring it annually or quarterly, we can understand how our business operates in general and whether we should change how we sell the products or charge for them.
A single source of revenue a business generates is called a revenue stream. These are often divided by customer segments that bring revenue via a given method. The two terms – revenue stream and revenue model – are often used interchangeably since, from the business perspective, the subscription revenue model will have a revenue stream coming from subscriptions. However, models can name multiple streams divided into customer segments, while the principle of revenue generation (subscription) will remain the same.
A good revenue model is a proven technique used by digital businesses globally, from startups to global corporations, to generate income from traffic on their website, mobile apps, and digital channels.
The 10 digital revenue model options explained in this include both ad revenue models and charging for access to a digital service, including freemium revenue models where limited free access is provided with fees charged for the full service.
I created this post originally in 2010 to support a revenue model spreadsheet for site owners to forecast their revenue generation. The main parameters you need to set are the variables for each Ad Unit or Container Type (blue fields), and it works out the revenue earning (orange fields) for you!
If you ‘plug-in’ some average figures for pay-for-performance-based advertising options like cost per click or cost per action approaches, as shown below, it shows why fixed fees and CPM models tend to be preferred by publishers.
It also shows that you need substantial traffic to make a lot of money through advertising. For example, at a CPM Of £10 with 2 ad units on the site, you would make just £4,000 per month even with a million page views per month for which you serve paid ads to 20% of the audience. Set this to 100% if you are selling all your ad inventory, for example, through Google Adsense.
This spreadsheet can also be used by owners of existing sites like publishers to estimate ad or affiliate marketing revenue from a site or section.
It allows these parameters to be set:
- % inventory – the proportion of ad space sold on sites
- Number of ad units
- CPM – Cost per thousand impressions for ad volume deals
- CPC – Cost Per Click for Pay Per Click Deals
Total revenue for each ad unit or container and corresponding Earnings per 100 clicks (EPC) or Earnings per thousand page views (eCPM) is calculated automatically.
The limitation of the model is that it assumes the same model across the whole site. It would be straightforward to modify it for different sections.
For a publisher or other media site owner, I identify eight revenue models, which are possible online.
Of course, transactional sites also have the option of these in addition to sales – online, and everyone is a media owner.
A range of documents can be accessed for a month or typically a year.
For example, I subscribed to FT.com for access to the digital technology section for around‚ £80 a few years ago. Smart Insights members have an annual subscription in this form.
Publishers often use a freemium revenue model where subscribers gain free access to a limited number of sample articles or downloads, but this is limited or metered. This is a common approach on newspaper publishers today, which may restrict to 3 articles per month.
Smart Insights have a freemium model with a free membership to access 20+ sample download templates and a paid subscription for all templates and e-learning.
Here payment occurs for single access to a document, video, or music clip that can be downloaded. It may or may not be protected with a password or Digital Rights Management. Smart Insights monthly subscription is effectively PPV since members are limited to 5 downloads per month (otherwise, they could download 100s of resources potentially).
For example, I’ve paid to access detailed best practice guides on Internet marketing from Marketing Sherpa.
Digital rights management (DRM) uses different technologies to protect the distribution of digital services or content such as software, music, movies, or other digital data.
(e.g. banners ads and skyscrapers).
CPM stands for “cost per thousand,” where M denotes “Mille.” The site owner, such as FT.com, charges advertisers a rate card price (for example, £50 CPM) according to the number of its ads shown to site visitors. Ads may be served by the site owner’s ad server or, more commonly, through a third-party ad network service such as Google AdSense, as is the case with my site.
CPC stands for “Cost Per Click.” Advertisers are charged not simply for the number of times their ads are displayed but according to their clicks. These are typically text ads similar to sponsored links within a search engine but delivered over a network of third-party sites on a search engine such as the Google Adsense Network.
Typical costs per click can be surprisingly high, i.e. they are in the range of £0.10 to “‚ £4, but sometimes up to £40 for some categories such as “life insurance” that have a high value to the advertiser.
The revenue for search engines or publishers from these sources can also be a fair proportion of this. For example, last year, Google made US $146.92 bn in advertising revenue.
For me, Google’s content networks are one of the biggest secrets in online marketing, with search engines such as Google generating over a third of their revenue from the network. Still, some advertisers do not realize their ads are being displayed beyond search engines, so they do not serve this purpose.
Google is the innovator and offers options for different formats of ad units, including text ads, display ads, streamed videos, and now even cost per action as part of its pay-per-action scheme.
A company can pay to advertise a site channel or section. For example, bank HSBC could sponsor the Money section on a media site. This type of deal is often struck for a fixed amount per year. It may also be part of a reciprocal arrangement, sometimes known as a “contra-deal,” where neither party pays.
A fixed-fee sponsorship approach was famously used by Alex Tew in 2005, a 21-year-old considering going to University in the UK who was concerned about paying off his university debts. This is no longer a concern since he earned $1,000,000 in 4 months when he set up his Million Dollar Homepage.
His page was divided into 100-pixel blocks (each measuring 10×10 pixels), of which there are 10,000, giving 1,000,000 pixels in total. Alex spent £50 on buying the domain name (www.milliondollarhomepage.com) and a basic web-hosting package. He designed the site himself, but it began as a blank page.
A new way of doing business
Therefore, building a digital business requires mastering new ways of looking at your business, and they primarily move around a key pillar (your customers/users or those for which your service/product provides a clear advantage) and a few elements:
- Product/service: building a digital product/service requires a mindset that goes from something scarce to something potentially unlimited. Digital products/services can also be quite expensive. Please think of how platforms like Google have to spend billions to keep operating their digital assets by investing in massive physical infrastructures (data centers)? Yet, those products often leverage network effects.
- Distribution: building a digital distribution means understanding the various channels existing on the web. New channels come every few years. But some of the channels you might want to take into account to enhance your digital business are email marketing (newsletter), search engines (Google, YouTube, DuckDuckGo, Bing, Yahoo), social media/discovery-driven platforms (Google Discover, Facebook, Instagram, YouTube), and creative media (TikTok) to mention a few.
- Value proposition: a digital business model value proposition can often be delivered by providing the upside without the downside. Think of how Google makes you search for anything without requiring you to bring an encyclopedia in your pocket.
As the story goes, McDonald’s started to use a franchising model to grow its restaurant business, it became over the 1960s a giant in the restaurant business (or real estate, depending on the perspective).
McDonald’s leveraged the existing “Speedy Service System” developed by the McDonald’s brothers (what we would later call “fast food”), which was an incredible process development able to provide an improved product at a faster pace.
The speedy system itself represented the application of the manufacturing process to the restaurant business. Later another important building block was added.
The franchising model really became widely applied during the 1920s, and 1930s in the restaurant business as new physical communication networks (in the US, the Interstate Highway System) enabled people to move long distances with their cars.
Later on, Ray Kroc would apply the franchising model in its most aggressive form (different formats already existed centuries before) to McDonald’s existing operation to create one of the most scalable restaurant businesses globally.
But is franchising a business model, a revenue model, or a growth (expansion) strategy?
Well, franchising alone is just a distribution/growth/expansion strategy.
Yet, franchising combined with a product delivered differently (the “speedy system”), making up a whole new experience that made it a new business model: the heavy franchised McDonald’s business model.
It is not enough to have a good idea, and it has to make money! I hope that the preceding article helped give you tips on making money in a digital business.
Article compiled by hughesagency.ca
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