8 Online revenue model options for Internet businesses

Selecting the best revenue options for Internet startups

I’m often contacted by site owners with an idea for a new site who are trying to work out how much revenue they’ll be able to raise depending on the number of visitors to their site.

There’s no simple answer to this, but to help, several years ago I created this spreadsheet model which also features in my books as an activity to help students working on this topic. It shows the main parameters you need to set – blue fields and it works how the revenue earning – orange fields.

The Site Ad revenue model

If you plug in some average figures for pay-for-performance-based advertising options like cost per click or cost per action approaches li as shown below it shows why fixed fee and CPM models tend to be preferred by publishers.

It also shows that you need substantial traffic to to make much money through advertising. 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, as for example through Google Adsense.

To use this model different Internet site revenue models and income potential use our online revenue model spreadsheet – see Ad Revenue model worksheet (for Expert members). This includes a range of Internet planning models including a way of assessing Internet revenue sources – this is on worksheet 3.

How to use the revenue model calculator

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 of site.

It allows these parameters to be set:

  • % inventory – 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) are 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.

The 8 Internet revenue model options

For a publisher or other media site owner, I would identify eight types of revenue model which are possible online. Let me know of any I’m missing :)

Of course, transactional sites have the option of these also in addition to sales – online, everyone is a media owner.

1. Revenue from subscription access to content

A range of documents can be accessed for a period of a month or typically a year.

For example, I subscribed to FT.com for access to the digital technology section for around ‚ 80 GBP per year a few years ago. Smart Insights Expert members have an annual subscription in this form.

2. Revenue from Pay Per View access to document

Here payment occurs for single access to a document, video or music clip which can be downloaded. It may or may not be protected with a password or Digital Rights Management.

For example, I’ve paid to access detailed best practice guides on Internet marketing from Marketing Sherpa.

Digital rights management (DRM) The use of different technologies to protect the distribution of digital services or content such as software, music, movies, or other digital data.

3. Revenue from CPM display advertising on site

(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 GBP CPM) according to the number of its ads shown to site visitors. Ads may be served by the site owners own ad server or more commonly through a third-party ad network service such as Google AdSense as is the case with my site.

4. Revenue from CPC advertising on site (pay per click text ads)

CPC stands for “Cost Per Click“. Advertisers are charged not simply for the number of times their ads are displayed, but according to the number of times they are clicked. These are typically text ads similar to sponsored links within a search engine but delivered over a network of third-party sitesby 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 GBP 0.10 to “‚ GBP 4, but sometimes up to GBP 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.

Google Network Revenues through Ads generate around one third of Google’s revenue. For me, the 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, but some advertisers not realising their ads are being displayed beyond search engines and so not served for 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.

5. Revenue from Sponsorship of site sections or content types (typically fixed fee for a period)

A company can pay to advertise a site channel or section. For example, bank HSBC could sponsors 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 is 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.

6. Affiliate revenue (CPA, but could be CPC)

Affiliate revenue is commission based, for example I display Amazon books on my personal blog site DaveChaffey.com and receive around 5% of the cover price as a fee from Amazon. Such an arrangement is sometimes known as Cost Per Acquisition (CPA ).

Increasingly this approach is replacing CPM or CPC approaches where the advertiser has more negotiating power. For example, in 2005 manufacturing company Unilever negotiated CPA deals with online publishers where it paid for every e-mail address captured by a campaign rather than a traditional CPM deal.

However, it depends on the power of the publisher who will often receive more revenue overall for CPM deals. After all, the publisher cannot influence the quality of the ad creative or the incentivisation to click which will affect the Clickthrough rate on the ad and so the CPM.

7. Subscriber data access for e-mail marketing

The data a site owner has about its customers is also potentially valuable since it can said different forms of e-mail to its customers if they have given their permission that they are happy to receive e-mail either from the publisher or third parties. The site owner can charge for adverts placed in its newletter or can deliver a separate message on behalf of the advertiser (sometimes known as list rental). A related approach is to conduct market research with the site customers.

8. Access to customers for online research

An example of a company that uses this approach to attract revenue from surveys is the teen site Dubit.

Considering all of these approaches to revenue generation together, the site owner will seek to use the best combination of these techniques to maximize the revenue. To assess how effective different pages or sites in their portfolio are at generating revenue, they will use two approaches. The first is eCPM, or effective Cost Per Thousand.

This looks at the total they can charge (or cost to advertisers) for each page or site. Through increasing the number of ad units on each page this value will increase. This is why you will see some sites which are cluttered with ads. The other alternative to assess page or site revenue generating effectiveness is Revenue per click (RPC), which is also known as Earnings Per Click (EPC).

This is particularly important for affiliate marketers who make money through commission when their visitors click through to third party retail sites such as Amazon, and then purchase there.

  • http://subscriptionsiteinsider.com Anne Holland

    So happy to see you put subscription revenues at #1. Worth noting that our research shows more than 50% of subscription sites have a mixed revenue stream or hybrid model. So, they sell subscriptions plus either ads, and/or ebooks, and/or consulting, and/or trade show tickets, etc. In fact, multiple revenue streams are so important to the industry’s profits, that the financial modeling spreadsheet we give SubscriptionSiteInsider.com members has alternate revenue models baked in.

    The key we’ve discovered through many of our SubscriptionSiteInsider.com case studies is that you have to pick one single revenue stream to be the primary one. Everything else, then, is secondary. Otherwise you risk confusing your audience and fragmenting your internal staff and strategy. You can have loads of secondary revenue sources — Angie’s List, for example, has six or seven.

    • http://www.smartinsights.com/about-dave-chaffey/ Dave Chaffey

      Thanks Anne, for sharing the popularity of hybrid revenue models for publisher sites and the importance to have a clear focus on your main revenue model. For subscription sites the spreadsheet can be used to estimate multiple revenue options with the affiliate calculation amended to calculate initial revenue from this source. Of course you need to take into account % who keep membership for which lifetime value modeling is required. This post gives details and a spreadsheet on this:
      http://www.kaushik.net/avinash/2010/04/analytics-tip-calculate-ltv-customer-lifetime-value.html.

      As a side point I’ve always found it peculiar that some Ecommerce and travel sites sell advertising as an additional revenue contributor, but I feel it would often make the experience worse and potentially reduce conversion due to user confusion. Amazon is the obvious example – but when I last looked in their SEC report it’s a tiny, single figure percent of their revenue. With my spreadsheet you can readily forecast what the revenue contribution would be.

  • http://www.prpsolutions.com Arihant Kothari

    Great ideas. Any idea on what could be the revenue model for the website given above given that the website wants to keep the membership free ?

    • http://www.smartinsights.com/about-dave-chaffey/ Dave Chaffey

      Hi Arihant, thanks.

      With free membership the best options are affiliate and advertising revenue. Many use Google Adsense for simplicity although the models above show that the revenue isn’t great until you have high volume of visits. Anne’s site – see comments above – shares more info on this.

      Dave

    • KL

      Sure ads. A free membership site could solicit ads much the same as bloggers do.

  • Sebastion_2008

    can u find me different types of revenue models that can be adopted by an e-commerce site.

  • Sebastion_2008

    more than 1000 words)

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  • Slamba11

    A question about fixed run-of-site sponsorship —

    What parameters ought to be taken into account when determining this figure? The calculations provide formulae to determine CTR; but the actual cost doesn’t change. Any ideas on how to calculate a fair price for this sort of advertising?

  • lespaul

    Great post, thanks! But in reference to #1 and #2 – you cant use them together. Meaning it would be unwise to charge your subscribers a “access fee” then recharge them again to open up a document (pdf, video, etc) – I understand the need for DRM, but it almost seems this should be part of the “access subscription fee”.

  • Student

    Really Really Good – Smart and concise and to the point, very educational and very very useable, well done and thank you for sharing your insight and knowledge
    D Tighe – MBA Student.

  • http://www.facebook.com/anjanasilva Anjana Silva
  • http://pulse.yahoo.com/_474B6WVY53JXPHGYZRFLY7USDU Shiv Jaiswal

    thanks for online revenue generation techniques. Can you please tell h ow to use Email markettings perfectly for this purpose.

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  • http://twitter.com/joey89924 joey

    I understand the need for DRM..
    SSM2164

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  • KidLewis

    Whilst I think this article is very good, I am at the next level. I understand exactly the revenue potential of a website but how do you use KPI to justify a revenue figure when going into one of these revenue streams?

    take display as an example, how do you set a rate when you’ve not used that before?

    you have the following key KPI’s (I believe)
    Time per visit
    Pages per visit
    % Returning visits
    Number of ad positions per page
    position of page (i.e. an MPU within the website above the fold is a higher CPM than a leaderboard in the footer).

    Your user profile (ABC1, etc)

    now once you get figures for that how do you formulae the CPM of your website as Run of site and also by content section?

    there is no rule, no benchmark, nothing.

  • ahj_2000

    Great Site. One thing I had an issue was though is the CTR’s of CRM is just .1%? I guess this is a purely fictional assumption?

    Does anyone have a rough guess of what this number would be for real? I am trying to start a business and I am having a hard time finding out things like this.

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  • Tapas

    what is Clicks-CPM ads = 400 in display advertising

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    Very useful and Worth sharing content. Highly helpful for amateur marketing professionals like me.
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