By Rob Diana of Regular Geek (Twitter/FriendFeed)
During my morning reading, The Long Tail had a link to a survey of Web app business models. If you take a look at the charts listing the revenue models, you will see there are twenty models listed. However, that is not an exhaustive list of ways to make money. Some of the models, such as Fixed and Variable Subscriptions, have several "implementations" that you can attempt.
Having said this, why is it that monetization is so hard for many Web 2.0 applications? Let's look at what needs to be done to support the various business models.
Subscriptions
1. Fixed subscriptions are a simple concept where people pay monthly fee for a product or service. Typically, you can charge for removing advertisements or some level of premium features. The problems with fixed subscriptions are that you need to create a subscription payment system and you need something to charge for. The first issue can be rectified by integrating with something like PayPal. The second issue is what most sites have difficulty with, what do you charge for? Premium content or features are much harder to find as you want to ensure you can build as large an audience as possible. Premium features need to be really interesting, and generally not available for free elsewhere.
2. Variable subscriptions are much more interesting. These are things like charging for use of an API or data feed. These are difficult as it requires a large amount of tracking application usage, and the pricing plans are more difficult to administer. Again, there are the questions of whether your services are generally available for free or even that useful.
Third Party Support
3. Advertising is the most common form of third party support. However, most Web applications are not launching with advertisements, which I think is a mistake. Google AdSense may not help you make millions, but maybe it offsets the costs a little bit and it opens up opportunities for real advertisements in the future.
4. Sponsor is a glorified word for really nice advertiser. A sponsor typically has a permanent advertisement on the site. These are nice, but it typically requires a decent amount of traffic in order to attract one.
5. Paid content is the black sheep of third party support and generally vilified by bloggers. The amount of negative publicity that you could receive from paid content may not be worth the money, especially if your site is still young. I would definitely recommend against this unless you are an established blogger and can easily defend your position.
Products And Pay-Per-Use
6. Products and Pay-Per-Use are probably the hardest monetization models to use. Do you have a physical product or virtual product that you can sell? Are people even willing to buy your product? Products typically require a significant amount of capital to develop or purchase, so your costs are generally high as well. Pay-per-use models are also difficult to develop. PayPal is an excellent example, where they charge transaction fees for each transaction. Just like the variable subscriptions, tracking of application usage can be difficult and for transaction fees, there is a large amount of financial work involved. Most technical people do not have significant financial background, so there is a large knowledge obstacle to overcome.
Services
7. Branding tends to be a side effect of what you have tried to do with your application. However, there is good money to be made from consulting and speaking engagements. This is an interesting option, but it tends to be more of a personal option as opposed to monetizing your application directly.
8. Create a platform. This is part of the model for the iPhone. You can charge developers for the development kit. This is immensely difficult to do because your platform must be hugely popular. Twitter is becoming a platform, but has been so open with their API that they would have difficulty charging people at this point. With this option, you should start charging immediately when it is released.
9. Affiliate sales are also an interesting option and do not require a huge amount of initial work. The difficulty with affiliate sales is that you still have to create something that is worth buying. I would also think that the amount of revenue possible from affiliate sales is smaller than most people creating Web applications would want. Granted, I do not have experience with this model, but you are sharing revenue with the people who are your affiliates. You could create a larger sales network in this way, but people would have to want to sell your product.
10. White label services do not appear very often for some reason. This is similar to the platform model, but the difference is that your software is not obviously at the forefront of the product. Ning is the most widely known option in the social network space, but there is a significant amount of competition. This model also requires some portion of other models as well. Ning has fixed monthly subscriptions as well as variable usage subscriptions. You could avoid mixing models by charging a larger fee for the initial creation of the white label service, but a larger initial payment will also scare potential buyers away.
Obviously, this list is not complete, but these basic models can be implemented or even integrated into most applications. I have avoided the "holy grail" of internet applications, selling the entire startup, as there is no direct way to implement this. It is also ridiculously difficult to survive without any monetization and be purchased for a decent amount of money. Most potential acquirers would like to see some semblance of revenue and potential revenue before buying something. It does help to be the hot application in the hot industry, i.e. YouTube or Twitter, but there are very few opportunities to do that and there will be tons of competition.
Read more by Rob Diana at RegularGeek.com.
Labels: API, monetization, PayPal, Twitter, YouTube