The hoopla surrounding the Internet is slowly being tempered
by the realities of the marketplace. Everyone talks about making money on the
Internet, but actually achieving profit has required a clear plan of attack and
marketing strategy. The former mantra, "There is easy money to be
made!", is slowly being replaced by a new mantra, "How?"
This article will summarize some of the trends I have been seeing in my
practice of representing Website entrepreneurs. The outcomes may be surprising.
While there is a robust and energetic cadre of Web entrepreneurs, many of them
are unprepared for the realities of the Net economy. However, this article
should provide the savvy Web entrepreneur with ways to identify and maximize
the viability of their Website concept.
There are competing "physical space" models for Website concepts
that will dictate which sources of revenue are most viable for your concept.
The models include:
The subscription model. This approach relies on revenue streams
generated from end users.
The shopping mall model. This approach simulates the revenue streams
a shopping mall landlord might see, which includes a fixed fee plus performance
incentives. This model also includes what I call the "travel agent"
model, which more generically represents generating revenues from facilitating
and/or closing transactions between end users and vendors.
The advertising model. This approach relies on revenue streams from
advertisers.
The computer services model. This approach generates revenues from
providing computer services, such as storage space, HTML mark up and design
services, and consulting services.
The "ancillary business" model. This new and important
model does not have an easily identifiable physical space analogy. In this
model, the revenue streams do not come from the Website per se, but rather are
generated through sales of goods or services ancillary to the Website.
This is a classic business approach, which endeavors to collect revenues
from end users, presumably based on the value of the service to the end users.
Comparable analogies might include newspaper and magazine subscription rates
and the monthly and hourly charges now levied by the big online services and
the small subscription BBSs.
However, many Website entrepreneurs are not prepared to hear that the
subscription model is uniquely UNSUITED for the Web environment.
· Web Culture
First, the nature of the Web dictates that users are accustomed to moving
freely from site to site. Sites that require registration, even free, present
significant psychological barriers to users' entry. As a result, these sites
must offer special and unique services to attract and retain users.
· No Rewards for Distribution Costs
Second, and more importantly, it is a fallacy that subscription models
succeed in physical space. For example, in all but the most specialized
publications, magazine and newspaper subscription rates cover only the cost of
distribution, such as the cost of printing and delivering the content to the
end user. Any "profits" are generated from advertisers, not end
users.
Another noteworthy example is software and multimedia materials. Many
software and multimedia products are now bundled with the hardware at little or
no extra cost to the end users. While some mass market software and multimedia
products still command high prices, much of the revenues go back into the
distribution chain and not to the content creators.
On the Web, the cost of distribution is approaching zero. Therefore, end
users will not be willing to pay for any distribution costs. When distribution
value is subtracted, the only value rewarded by users is the value of the
content--a surprisingly low value.
· Content is Cheap
Although many entrepreneurs are not prepared for this, content is cheap. The
other revenue streams I describe in this article will be enough to support a large
and robust industry of content developers. This will mean that content will be
widely and freely available to end users. "Subscribing" to content
will soon seem archaic--if you can get good content for free, only
extraordinarily high value content will warrant and receive subscriptions.
This is not to say that end users will not pay for "gatekeepers,"
or indexers who scan the Net and make the most useful items available. In
"drinking from a firehose," users can easily be overwhelmed by the
quantity of information available on the Net. As a result, providing indexing
services will remain a "profitable" strategy available to Website
entrepreneurs. But this approach has two caveats. First, the potential
entrepreneur must find and extract revenues from the end users willing to pay;
a formidable feat in the anarchistic Net. Second, as with ultra-specialized
periodicals that generate profits from their content (and not just their
distribution), the number of competitors on related topics and the hyper-specialization
required to be an expert dictate that the size of the market for such services
on any one topic will be small. Global visionaries need not apply.
· Net Access is a Commodity
Finally, I can sense some readers focusing on the supposed profits that must
be accruing to commercial online services based on their high monthly and
hourly fees. The problem is that it is not clear that any profits are going to
be available in Webspace by trying to mimic the commercial online services.
Prodigy is not and never has been profitable, and neither are most commercial
BBSs. CompuServe and AOL are both anxiously awaiting Microsoft Network, which
will feature a very low monthly fee and will shift the burden of creating
revenues to the constituent vendors. With Microsoft placing extreme price
pressure on providing Internet access and the explosion of content providers,
the commercial online service industry is not going to be for the faint of
heart.
Furthermore, to the extent that these services are getting away with high
monthly and hourly fees, consider how much of these revenues are being spent on
either providing service access or on "distribution" services. The
major online services all have their own proprietary--and expensive--network of
distributed computers and telephone POPs. Remember, on the Web, end users are
not going to pay Websites for this type of infrastructure.
End users will pay for Internet access, but it will be to their Internet
service provider. Some Website entrepreneurs will also be Internet service
providers-but this is not the same as generating revenues from the Website, and
entrepreneurs should not be confused on this point.
· Conclusion
The era of end user subscriptions for content is coming to an end. There
will always be subscription services, but they will be small in number and
size, profiting purely on the high value of the content to a narrow segment of
users. Mass market content producers who relied on making profits from the
distribution chain will find the users' attitudes and the Net economy quite
unforgiving.
For all the Internet hype, there is one certainty: online commerce will
become an industry of mind-boggling proportions. According to Upside
Magazine, home catalog shopping was a $51 BILLION industry in
1993--and economics and convenience dictate that this entire industry alone
will probably be handled online in the near future.
There are a number of ways that these and other vendors will reach their
target audiences. However, one of the best conceptual models is the regional
shopping mall--Website entrepreneurs will bundle vendors together in online
malls, and then work with the vendors to bring consumers onsite and facilitate
commerce.
In a typical shopping center lease, the landlord has a two-tier revenue
stream. The landlord charges a base rent and also receives a percentage of the
gross sales the vendor actually makes. This structure makes a lot of sense: the
base rent covers fixed expenses, while the percentage kicker gives the landlord
incentives to bring consumers onsite and put them in a shopping mood.
Similarly, the crafty Website entrepreneur can find potential profits here.
The process of setting up a Website is reasonably simple and not
extraordinarily expensive, so over time many potential vendors will set up
their own Websites. However, the true entrepreneur will recognize that having a
Web presence does not translate into sales, and therefore a market
discontinuity exists for entrepreneurs to find better ways to bring to the
vendor the right kind of shoppers.
I expect that the base rent with percentage kicker model will become a
standard model for compensating Websites. It gives plenty of incentives to the
Website entrepreneur while allowing the vendor to pay for results. I like to think
of it as a superior model to selling direct marketing mailing lists--the
Website is delivering potential customers to the vendor, but the vendor only
has to pay for results, not prospective results.
Note, however, that this model works only for transactional relationships.
It is easy enough to measure the revenues that come in through transactions
made online, but it is difficult to measure when the Website led to other
revenues (such as orders through an 800 number or increased in-store sales).
Further, this model is predicated on the availability and security of online
financial transactions. There are a number of solutions in the pipeline for
credit card encryption and anonymous "digital cash," but at the
moment these solutions are not reliable or universally accepted.
As juicy a target as online shopping is, the advertising industry is a juicy
target in its own right. According to Upside Magazine, in 1993 TV,
cable, and classified advertising collectively generated $43 BILLION in
revenues. Not all of this will translate into the online sphere, but a large
chunk of it will.
The advertising industry can be roughly divided into two segments: mass
market advertising and special interest advertising. Because of the difficulty
of reaching broad segments of the market while online (other than by the
disfavored spamming technique), I suspect that much of the mass market
advertising will remain with broadcast/one-to-many media for the foreseeable
future and the online industry will see only a small chunk of these revenues.
However, the Web truly shines in narrowcasting, and the ability to reach
small, self-selected groups of interested consumers will prove very alluring to
advertisers.
Extracting revenues from these advertisers is a little more tricky and
requires some savvy marketing on the part of Website entrepreneurs. Because
advertisers can set up their own Websites, Websites will need to offer an
enhanced ability to identify and pull in the potential consumers valued by
advertisers, and will need to document or demonstrate this in a tangible way.
There are a number of ways to measure the Website's success, each with its own
opportunities and pitfalls.
· "Hits"
One solution I continually encounter in my practice is the use of "hits."
Virtually all Website programs allow the sysops to track the number of
"hits" the Website is receiving. Some Websites have used this
information to indicate the number of "eyeballs" being delivered to
the advertisers, and some Websites further charge the advertisers based on the
number of hits.
"Hits" is an ambiguous term. Sometimes hits can mean the number of
times a screen is displayed. Other times hits means the number of mouse clicks
made by users. Either way, hits are a very poor metric.
Frequently, sysop access counts as one or more hits. Unscrupulous sysops can
easily run up the tally, but even scrupulous sysops will generate many hundreds
of hits a week in the normal course.
Also, hits does not translate into quality viewership. For example, assume
that an advertisement is two levels deep. I access the first level and then the
second. To exit the second level and return to the introductory screen, I could
hit some "go to home" button on the second level screen, or I could
just click on the "go back" menu option on Netscape or Mosaic twice.
Passing through the first level screen would count as a hit, even if I did not
look at the screen a second time (and even if I did, I had seen it previously
on my way down to the second level).
There are many other ways to pad the hits count or to register hits without
receiving the intended benefits. Although this hits padding is ostensibly more
favorable to the Website, I still recommend that Websites do not use this
measure at all. Savvy advertisers will clearly not allow it, and
unsophisticated advertisers will soon be disenchanted with the dichotomy
between charges and results. The Website entrepreneur with an interest in
having happy advertisers will use the "hits" measure very
judiciously.
· "Per Subscriber"
Currently many Website programs keep data only on the identity of the
servers used by individuals who access the Website. This can obscure key data
on the number of individuals coming to the site: 500 accesses from a Netcom
server could mean accesses by 500 different individuals or 500 accesses by one
zealous user.
In the future, Websites will be able break down the aggregated data and show
the number of individuals who accessed the site and the number of accesses per
individual. Clearly, potential advertisers will find this information useful,
both to see the number of eyeballs they are reaching as well as the depth of
interest among those eyeballs. However, even as the technology is developing to
do this, Websites are currently having a fair amount of success in generating
this information voluntarily. Many Websites have voluntary registration forms
that they request users to fill out; surprisingly, users fill the forms out! A
central maxim in marketing is to "know your customer" and these forms
allow you to do so.
· "Fixed Price" with Bonuses
The other primary approach for charging advertisers is to charge a fixed
price per month. This fee is analogous to the advertising fees charged by print
periodicals and can and should vary based on the location of the advertisement
in the Website and the demographic statistics of the Website.
To develop the demographic statistics, Websites should generate the user
information by using registration forms and tracking user/server identity. Hits
can be used as a generic metric, so long as this is not the sole measure of
Website activity.
We are seeing a cyberspace-unique spin being used in these contexts. Much
like the idea of collecting a percentage of transactions generated online,
Websites can and should ask for financial compensation if the Website can
demonstrate that the user requested and received more information than a
generic amount. For example, the Website could use a modified hits metric to
charge an increasing amount for each level deeper into an advertisement that a
user goes. In such a scheme, if the user goes one level deep, there would be no
additional charge; if the user goes a second level, there would be a nominal
charge (maybe a nickel per hit); if the user goes deeper, the charge would
increase rapidly since this would indicate that the Website has delivered a
very interested user. Similarly, if the Website or the advertiser uses a
"request for more information" form, the Website should be entitled
to a relatively high amount per form submitted (maybe on the order of $1.00 per
form). These progressive payment systems are appropriate in that they again
give Websites the incentive to deliver the right kinds of users while the
advertiser pays more based on the interest expressed by the user.
Of course, if users are able to order online, the Website should expect to
get a percent of the transaction. If your Website can generate results, you
should share in the upside!
· Privacy
Websites are uniquely positioned to deliver extremely high-value marketing
research information to advertisers. Whether done automatically or based on
voluntary user forms, Websites could easily provide advertisers with key
information about users: what server they most immediately came from, what
server they went to next, or the sequence of mouse clicks and keystrokes each
user made. Not only would this information be useful in the aggregate, but it
would allow the Websites to provide profiles about each individual user.
Websites in turn could sell this information to advertisers and marketing
research companies, presumably for significant sums.
There are numerous laws that might govern the disclosure of this
information, but consumers and users should not misinterpret this to mean that
their information is required to be kept private. On the contrary, it is much
more likely that this information can be legally disclosed by Websites, who
will have a great deal of financial incentive to do so.
Nevertheless, I believe Websites have an ethical or moral obligation to be
circumspect before making these disclosures. My recommendation is that Websites
planning to collect and disseminate this information, especially if it involves
individual user profiles, should make full and clear disclosure to end users
before this information is gathered.
This solution actually should lead to optimal results in a free marketplace,
because users who do not wish to make such disclosure will choose to go to
other Websites. Meanwhile, Websites who want to gather and disclose this information
will have incentives to provide extra-valuable information that will attract
users. Note, as an analogy, the ability of companies to set up focus groups, do
test screenings of movies, and exchange free coupons for filling out surveys.
If users have a choice and full disclosure, they will make the decision right
for them.
· Conclusion
I think we are going to see an explosion of advertiser-supported Websites,
much akin to the oft-rumored 500 cable channels. Websites are uniquely able to
attract and segregate users with narrow but well-defined special interests, and
advertisers will be willing to pay for access to these potential consumers.
However, Website advertising is an area where I believe the fair and ethical
sysops can and should win over those looking to make a quick buck. You can use
hits as your metric or sell data about your users, but over the medium run
these strategies will prove less profitable than using fair metrics and making
full disclosure. Website administration is a multiple iteration
process--bending the rules to maximize the value of one iteration will
negatively affect the value in the next iteration.
Website sysops can find a lucrative set of revenue streams by offering
various forms of computer services. Especially given the volume of technically
untrained people and companies seeking to get on the Net, Website entrepreneurs
find many opportunities to use their valuable expertise and resources.
· Computer Storage/Personal Web Pages
You may encounter people and companies who want a Web presence. You may have
extra storage space and bandwidth capacity. Many Websites are using this to
offer "Website lites"--that is, Website space and Internet
connections without the user having to obtain the hardware.
For example, many Internet service providers now offer users the opportunity
to create their personal home pages. With the ability to obtain domain names
cheaply, the Website can present these personal pages as their own seemingly
autonomous Websites.
One client asked me to draft a contract that charged customers "per
page." Clearly "pages" are not a good metric, since a home page
could contain a large number of links or items making heavy storage and
bandwidth demands (such as sound or video files). The client ultimately used
storage space as a metric, a very sensible result.
There is a robust industry of entrepreneurs who help people establish their
own Website for an initial service fee (see below) and a monthly "storage
and bandwidth" charge. I have seen the monthly fees range from $25 to $200
per month and more, so it will not take many clients to start the cash flow
pouring in.
The lawyer in me demands that I point out an important and dangerous legal
pitfall here. The legal issue of whether and when a sysop or sysadmin is liable
for the statements and actions of their users is unsettled right now. It is
quite possible that users will abuse their rights and create legal liability
for the Website. Some of this liability can be allocated or even avoided
contractually, so good contracts are a must in this arena. It would be foolish
to bet a company on an uncertain legal risk, or to try to protect it with a
weak contract.
· HTML Mark up and Design Services
No matter how technically savvy customers are, there are still many reasons
why they will seek HTML mark up and design services. A well-linked and good
looking page really stands out, and customers know this. Non-technical
customers will almost certainly be willing to pay for the mark up and design
services-in the case of corporate customers, they may have no problem spending
thousands of dollars on these services. The lesson: expect some revenues from
these services, and do not give them away.
· Consulting Services
Even today, more than 15 years after the introduction of the PC, many
consultants make a great living teaching people how to use computers. With the
Internet and the Web, the need for support is even greater.
The Website entrepreneur's computer, Internet and Web expertise will be
highly prized by customers running around scrambling to "get on the
Information Superhighway." Even better, the Website can be the perfect
marketing tool for the creator's expertise.
The Net is unique in many ways, but one dimension really stands out. Many
users of the Net offer their intellectual product for free, and in the case of
personal home pages, sometimes the time investments made are extraordinary.
In some cases this is merely an ego statement: on the Net people can reach a
global audience, and some get giddy with the power. In other cases, there is an
explicit profit motive that I'll describe in a moment.
In either event, the result is a commodification of content. So much content
is being put out for free that users will pay only for indexing or for
ultra-high value information.
Truly savvy entrepreneurs have recognized the profit POTENTIAL of putting
information on the Net for free. Time and time again an entrepreneur has
started out giving something away for free, only to make countless profits on
the next round. A good example is the video game Doom. Other examples have
occurred with list moderators who now are the nation's expert on the topic of
their list. Or take the example of a client of mine: they are willing to set up
vendor storefronts at nominal cost in order to set up relationships with these
vendors for highly profitable software and services. Or consider two Silicon
Valley lawyers, who have made their "Multimedia Law Primer" ubiquitous
on the Web--as an entree to sell their book at $20.00 a copy, which in
turn is an entree to sell their legal services at $200.00+ an hour!
A well-designed, information-packed, topic-specific Website could be the key
to making you the expert in your field. A Website giving away your freeware or
shareware could be the key to developing demand for version 2.0 (at $50
a copy, natch). A well-designed and attractive Website could be the key to
landing Website consulting and design business. And a few well-considered
co-marketing relationships could lead to a bonanza of commissions or revenues.
The maxim "help out your peers on the Net" has become good
business. In the many-to-many world of the Net, it will be hard to find your
customers. By disseminating something that they value and making it widely
available, you will create a reason for them to find YOU.
6. Conclusion
Obviously, the models I have set out do not exist independently. Indeed,
good entrepreneurs will find ways to generate revenues from each potential
stream. The important lesson is to isolate the revenue streams you are relying
on, test whether or not they are sustainable, and find the appropriate ways to
maximize them.
We live in a truly amazing era for entrepreneurs. Not since the advent of personal computers in the late 1970s and early 1980s has a $100 billion plus industry been so wide open to anyone and everyone. The industry is raw and full of pitfalls, but this article has given you many ways to generate revenue. Armed with the right tools and attitude, the possibilities seem bright indeed.