Business Models

The Proven Internet Business Models - Model Success

***A key to reducing risk in business success is to model what's already working.***

Most successful businesses have borrowed an existing idea and improved it or re-applied it in a new way Don't re-invent the wheel. Most businesses making money on the net today fall under one of six categories.

• Products
• Services
• Information industries
• Internet
• Careers
• Electronic publishing
• Electronic advertising

To understand the various ways you can make money on the net, let's explore some of the Internet Business Models in existence today.

Products - This includes such diverse items as real estate, electronics, books, music, instructional videos, computer hardware, computer software, household items, clothing, jewelry - to name a few. Portable media such as books, tapes, CD's, and videos are a natural. Any company that already has a Mail Order business set up should obviously be on the net. Think of the Internet in terms of direct mail marketing - essentially, it is electronic direct mail marketing. It's inexpensive to communicate with your customers worldwide, and your customers can look over your products on your Online catalog before they buy. Plus an Online catalog costs only a fraction of what a printed catalog costs and reaches more people. Duplication is achieved virtually, for far less cost than through traditional methods.

Specialized Services - Any service that can be advertised can be advertised electronically. This includes Professional services such as those offered by accountants, attorneys, consultants, architects and trainers, but today also includes evolving service sectors catering to busy people. Increasingly, our society is characterized by exchanges between specialists. That is, each person is a specialist in their field, and the opportunity cost of performing tasks that are not a part of their highly compensated area of expertise are too high; therefore, it makes economic sense for each person to hire service specialists in support areas, and concentrate their energies on the functions for which they can earn the greatest wage. Thus, there is an ever-expanding pool of new diversified service industries. Entrepreneurs who identify and exploit a new service industry are enjoying massive growth and profits, and the prospects for a continued rise are outstanding.

Information Industries - In a sense, these are people who gather, synthesize, package and re-sell knowledge. This includes Information Brokers, Professional Researchers, Communication Professionals, Consultants, and Authors, to name a few. This field is exploding, especially as more people have more access to more information. True success stories spring from those who successfully filter the flood of information and synthesize it into something new and useful. With the dawning of the Digital Age, this new field is growing at an all-time pace.

Internet Careers - Today, this ranges from avant garde to engineering, including graphic artists, web designers, programmers, technical-types, web development companies, computer and software trainers, and Internet consultants. In terms of new jobs, this is one of the fastest growing segments of our economy. Remember, over 95% of all people on the Web today were not there a few years ago! You may not consider yourself an expert, but there's a good chance you ARE, compared to many people just now coming onto the Net.

Electronic Publishing - This includes magazines, newspapers, newsletters, coupon books - literally any written material that is published can be converted into digital format and uploaded onto the web. In the very near future, you'll find that most publishers of printed publications, will also publish an Online version. The marginal extra cost of the Online edition more than pays for itself in additional readership and advertising revenue. TODAY we're seeing an explosion in Online-only publications, which cost a fraction of what it would cost to publish a printed version. Not to mention saving a few trees. Ask yourself what information YOU can publish? How can you make it entirely advertiser-supported?

Advertising - Electronic Advertising is simply selling advertising on the web. This is a fast growing and constantly changing field. There are New Media advertising agencies that specialize in creating and selling advertising space on the web. Every week, new companies spring up who have developed an innovative method of brokering advertising. Selling impressions is REALLY big business. Technically, anyone who has a web site that generates enough traffic can get sponsors or sell advertising on their site to companies wishing to reach that target market or demographic.

Brokerage Model - Brokers are market-makers: they bring buyers and sellers together and facilitate transactions. They can be business-to-business (B2B), business-to-consumer (B2C), or consumer-to-consumer (C2C) markets. A broker makes its money by charging a fee for each transaction it enables. Brokerage models can take a number of forms, such as:Buy/Sell Fulfillment -- This can be an online financial brokerage, like eTrade, where customers place buy and sell orders for transacting financial instruments. Also, travel agents fit into this category. In this the broker charges the buyer and/or seller a transaction fee. Some models work on volume and low overhead to deliver the best negotiated prices, for example, CarsDirect.

Market Exchange - increasingly common model in B2B markets. Good examples are MetalSite or ChemConnect's World Chemical Exchange. In the exchange model, the broker typically charges the seller a transaction fee based on the value of the sale. The pricing mechanism can be a simple offer/buy, offer/negotiated buy, or an auction offer/bid approach. Buyer Aggregator -- Model pioneered by Mobshop, which describes buyer aggregation as the process of bringing together individual purchasers from across the Internet to transact as a group so they can receive the same values traditionally afforded to organizations who purchase in volume. Sellers pay a small percentage of each sale on a per-transaction basis.

Distributor - A catalog-type operation that connects a large number of product manufacturers with volume and retail buyers. B2B models are increasingly common. Broker facilitates business transactions between franchised distributors and their trading partners. For buyers, it enables faster time to market and time to volume as well as reducing the cost of procurement. By providing the buyer with a means of retrieving quotes from preferred distributors -- showing buyer-specific prices, lead-time, and recommended substitutions -- transaction are more efficient. For distributors, it decreases the cost of sales by performing quoting, order processing, tracking order status, and changes more quickly and with less labor. [ex: NECX]

Virtual Mall - A site that hosts many online merchants. The Mall typically charges set-up, monthly listing, and/or per transaction fees [see, for example Yahoo! Store's terms. The virtual mall model may be most effectively realized when combined with a generalized portal. Also, more sophisticated malls will provide automated transaction services and relationship marketing opportunities [ex: Yahoo! Stores, ChoiceMall, Women.com's Shopping Network]

Metamediary - coined by Mohanbir Sawhney as a business that brings buyers and online merchants together and provides transaction services such as financial settlement and quality assurance. It is a virtual mall, but one that will process the transaction, track orders, and provide billing and collection services. The metamediary protects consumers by assuring satisfaction with merchants. The metamediary charges a set-up fee and a fee per transaction. Expect to see virtual malls move more in this direction. [ex: Amazon 's zShops, VirtualSellers].

Auction Broker - A site that conducts auctions for sellers (individuals or merchants). Broker charges the seller a fee, which is typically scaled with the value of the transaction. Seller takes highest bid(s) from buyers above a minimum. Auctions can vary in terms of the offering and bidding rules. [ex: eBay, AuctionNet]

Reverse Auction - The "name-your-price" business model, also called "demand collection," pioneered and patented by Priceline. Prospective buyer makes a final (usually binding) bid for a specified good or service, and the broker seeks fulfillment. The broker's fee is the spread between the bid and fulfillment price and perhaps a processing charge.

Classifieds - A listing of items for sale or wanted for purchase, typically run by local news content providers. Price may or may not be specified. Listing charges are incurred regardless of whether a transaction occurs. Search Agent -- An agent (i.e., an intelligent software agent or "robot") used to search-out the best price for a good or service specified by the buyer, or to locate hard to find information. [DealTime, MySimon, RoboShopper, R U Sure] An employment agency can act as a search agent broker, finding work for job-seekers or finding people to fill open positions listed by an employer. [Cruelworld]

Advertising Model -The web advertising model is an extension of the traditional media broadcasting model. The broadcaster, in this case, a Web site, provides content (usually, but not necessarily, for free) and services (like email, chat, forums) mixed with advertising messages in the form of banner ads. The banner ads may be the major or sole source of revenue for the broadcaster. The broadcaster may be a content creator or a distributor of content created elsewhere. The advertising model only works when the volume of viewer traffic is large or highly specialized.

Generalized Portal - high-volume traffic -- typically tens of millions of visits per month (see chart at right) -- driven by generic or diversified content or services (ex: search engines and directories like Excite, AltaVista and Yahoo! or content driven sites like AOL). The high volume makes advertising profitable and permits further diversification of site services. Competition for volume has led to the packaging of free content and services, such as e-mail, stock portfolio, message boards, chat, news, and local information.

Personalized Portal - The generic nature of a generalized portal undermines user loyalty. This has led to the creation of portals (ex: My.Yahoo!, My.Netscape) that allow customization of the interface and content. This increases loyalty through the user's own time investment in personalizing the site. The profitability of this portal in based on volume and possibly the value of information derived from user choices. Personalization can support a "specialized portal" model.

Specialized Portal - Here volume is less important than a well-defined user base (perhaps 0.5-5 million visits per month). For example, a site that attracts only golfers, or home buyers, or new parents, can be highly sought after as a venue for certain advertisers who are willing to pay a premium to reach that particular audience. Prediction: expect to see a proliferation of specialized portals in the near future.

Attention/Incentive Marketing - the "pay for attention" model -- pays visitors for viewing content and completing forms, or sweepstakes, or frequent flyer-type point schemes. The attention marketing approach has the most appeal to companies with very complex product messages, which might otherwise find it hard to sustain customer interest. The concept was pioneered by CyberGold, with its "earn and spend community" that brings together advertisers interested in incentives-based marketing with consumers looking to save. To facilitate transactions, the company developed and patented a micropayment system. Other loyalty-based relationship marketing approaches areNetcentives, or MyPoints.

Free Model - Give users something for free: site hosting [ex: FreeMerchant], web services, Internet access, free hardware, electronic greeting cards [BlueMountain]. Freebies create a high volume site for advertising opportunities. Viability is hardest when based purely on advertising revenue. Opportunity to blend with infomediary model. Bargain Discounter -- the most notable example is Buy.com, which sells its goods typically at or below cost, and seeks to make a profit largely through advertising.

Infomediary Model - Data about consumers and their buying habits are extremely valuable. Especially when that information is carefully analyzed and used to target marketing campaigns. Some firms are able to function as infomediaries by collecting and selling information to other businesses. An infomediary may offer users free Internet access [NetZero] or discounted PC hardware [eMachine] in exchange for detailed information about their surfing and purchasing habits. This is more likely to succeed than the pure advertising model.The infomediary model can also work in the other direction: providing consumers with useful information about the web sites in a market segment that compete for their dollar. One such example is Gomez.Recommender System -- is a site that allows users to exchange information with each other about the quality of products and services -- or the sellers with whom they have had a purchase experience (good or bad) [See: ePinions]. ClickTheButton take the concept a step further by integrating the recommender system into the web browser. Such agents monitor a user's habits, thereby increasing the relevance of its recommendations to the users needs -- and the value of the data to the collector. Recommender systems can take advantage of the affiliate model offered by merchants to augment revenue from the sale of consumer information.

Registration Model - Content-based sites that are free to view but require users simply to register (other information may or may not be collected). Registration allows inter-session tracking of users' site usage patterns and thereby generates data of greater potential value in targeted advertising campaigns. This is the most basic form of infomediary model. [ex: NYTimes.com]

Merchant Model - Classic wholesalers and retailers of goods and services (increasingly referred to as "e-tailers"). Sales may be made based on list prices or through auction. In some cases, the goods and services may be unique to the web and not have a traditional "brick-and-mortar" storefront.

Virtual Merchant - a business that operates only over the web and offers either traditional or web-specific goods or services (a.k.a., pure-play e-tailers). The method of selling may be list price or auction. An example of a service merchant is Facetime, which calls itself an "application service provider". It offers live customer support for e-commerce web sites. [ex: Amazon, eToys, Eyewire]

Catalog Merchant - the migration of mail-order to a web-based order business. [ex: jcrew ]Surf-and-Turf -- traditional brick-and-mortar establishment with web storefront. The model has the potential for channel conflict. [ex: Gap, Lands End, B&N]

Bit Vendor - a merchant that deals strictly in digital products and services and, in its purest form, conducts both sales and distribution over the web.

Manufacturer Model - This model is predicated on the power of the web to allow manufacturers to reach buyers directly and thereby compress the distribution channel (i.e., eliminate wholesalers and retailers). The manufacturer model can be based on efficiency (cost-savings that may or may not be passed on to consumers), improved customer service, and a better understanding of customer preferences. Perishable products that benefit from fast distribution, like fresh flowers [ex: Flowerbud], may prove advantageous by eliminating middlemen. The model has the potential for channel conflict with a manufacturer's established supply chain. [ex: Intel, Apple]

Affiliate Model - In contrast to the generalized portal, which seeks to drive a high volume of traffic to one site, the affiliate model, provides purchase opportunities wherever people may be surfing. It does this by offering financial incentives (in the form of a percentage of revenue) to affiliated partner sites. The affiliates provide purchase-point click-through to the merchant. It is a pay-for-performance model -- if an affiliate does not generate sales, it represents no cost to the merchant. The affiliate model is inherently well-suited to the web, which explains its popularity. Variations include, banner exchange, pay-per-click, and revenue sharing programs. [ex: see loadedafflicates a guide to affiliate programs on the web, or AffiliateWorld.]

Community Model - The viability of the community model is based on user loyalty (as opposed to high traffic volume). Users have a high investment in both time and emotion in the site. Having users who visit continually offers advertising, infomediary or specialized portal opportunities. The community model may also run on a subscription fee for premium services.

Business Trading Community - or "vertical web community," a concept pioneered by VerticalNet. It is as a site that acts as an "essential, comprehensive source of information and dialogue for a particular vertical market." VerticalNet's communities contain product information in buyers' guides, supplier and product directories, daily industry news and articles, job listings and classifieds. In addition, VerticalNet's sites enable B2B exchanges of information, supplementing existing trade shows and trade association activities. [see also: Buzzsaw.com, Guru.com]

Subscription Model - Users pay for access to the site. High value-added content is essential [ex: Wall St. Journal, Consumer Reports]. Generic news content, viable on the newsstand, has proven less successful as a subscription model on the web [ex: Slate]. A 1999 survey by Jupiter Communications found that 46 percent of Internet users would not pay to view content on the web. Some businesses have combined free content (to drive volume and ad revenue) with premium content or services for subscribers only.

Utility Model - The utility model is a metered usage or pay as you go approach. Its success may depend on the ability to charge by the byte, including micropayments (that is, those too small to pay by credit card due to processing fees). [ex: FatBrain, Authentica]