Website business models: Advertising based

What business models work online? We look at getting revenue from advertising

What format should a successful online business take? To determine this you have to know what your business is and what your customers want. Whatever it is, you will need to decide where your online revenue is to come from.

One popular model is to create a free-access information website. Content and information is the heart and soul of the internet and the reason why millions log on every day. Daily news, whether financial, sport, entertainment or news specific to your industry is what the vast majority of web users are after. But web users don’t just want plain news in front of them. They want originality, up-to-date, relevant reports in double quick time. Examples include large news and information sites such as the BBC, daily newspapers such as The Daily Telegraph or The Guardian as well as more specialised information based sites that are spread across the web such as startups.co.uk.

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So, with a dot com model based on free information, where does the revenue come from? The answer is simple – advertising. If your site receives enough visits – or hits – then the other companies will pay to advertise their goods and services. Sites like Yahoo can generate 90% of their revenue from online advertising. Many portals, however, expect users to set up their site as a home page or default to gain repeat visits and additional revenue.

With advertising being the sole revenue stream, content and advertising internet models can produce positive results but this is a somewhat narrow dot com path to walk down. This has recently been highlighted in a survey carried out by consultants Booz Allen & Hamilton, who found that internet portals such as MSN and Yahoo depend heavily on banner advertising. The survey recommended that they act quickly to find alternative revenue sources such as paid for content.

The study also revealed that internet users spend an average of four and a half hours a month on portals, about three times more than they spend at shopping or entertainment sites. When you look under the surface, this indicates that users view portals as a destination to use free services such as email, SMS (short message service), messaging for mobile phones, and news as launch pads to other sites. The end result is that even though banners still account for half of all internet advertising, only 1% of portal visitors are actually clicking on them.

Advertising is measured by click through rates. Each dot com often touts click through rate figures as well as the number of visitors or hits each month. But these should be taken with a pinch of salt as they are often thought to be inflated as an incentive to attract clients or advertisers. However, it is the advertisers that count and they will almost certainly ask for some kind of figures. The industry average is around 0.4% compared with direct mail which has a success rate of between 1.0% and 1.5%.

The simple truth is that if advertisers don’t get high returns on hits, click through rates and receive feedback from customers on brand awareness, then they won’t pay a single dollar to a portal to advertise their products and services.

Charles Cohen, founder of Beenz.com, an online service that rewards consumer behaviour believes the glitches in this model don’t end there.

“The advertising model involves getting a large volume of traffic on the site to sell advertising space but this works both ways. If you secure high volume of advertising you sacrifice quality but if you get a good amount of quality you sacrifice the amount of advertising.”

You also have to face up to other challenges such as creating and maintaining original content. If you succeed in doing this, your next task will be to achieve a consistent level of quality. You shouldn’t underestimate your audience as they will soon realise if your content is not original and of a good enough standard.

Dot coms can come unstuck at this level as an editorial team costs an arm and a leg. The BBC, even though it is publicly funded, works brilliantly due to its resources but with people expecting the earth for nothing many  companies have struggled.

 

If your site receives enough visits – or hits – then the other companies will pay to advertise their goods and services.

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