Understanding Online Business Models

By March 14, 2014 Posts

A business model defines how an organization creates a sustainable revenue stream that creates a profit previously based 100 years of business types. Here, we will look at business models that have proven successful online within the last 20 years.

The information presented here is based on research by Professor Michael Rappa, director of the Institute for Advanced Analytics at North Carolina State University. He wrote a document entitled Business Models on the Web which describes all the business models you need.

Advertising Business Model

Advertising model is an upshot of the conventional media broadcast business model. Instead, the website becomes the broadcaster that provides content to the users. The contents provided as well as the services rendered can be free and/or paid. Usually though, these are provided with the combination of adverts like banners, hovers and pop-ups. Some examples are NY Times, Monster, Yahoo!, Salon, and Craiglist.

Affiliate Business Model

Affiliate online businesses aim at providing purchase opportunities to the visitors when they arise. Financial incentives are usually offered to the partner sites or simply affiliates. Affiliates generally earn through commissions-based payments. Amazon and Barnes & Noble are two of the popular examples.

Brokerage Business Model

Brokers are considered as market makers as they draw together the sellers and the buyers. These businesses facilitate the transaction between the two parties. PayPal, Amazon and eBay are some examples of these. Others are Priceline, Orbitz, CarsDirect, Respond, Escrow, and ChemConnect.

Community Business Model

Community-based online businesses are very viable due to user loyalty. Users invest heavily on emotion and time more so since voluntary contributions of contents are required. Nonetheless, these businesses make profits through selling secondary products and/or services and through subscriptions and advertising. Wikipedia is one of the best community-based websites online. Others are Orkut, Flickr, and Facebook.

Infomediary Business Model

Infomediary is basically a portmanteau of information and intermediary. These online businesses contain producer and product-related information that are independently collected. These are the information that the consumers need before making a purchase thus assist both buyers and sellers in understanding a particular market. Some examples of these are Edmunds, CoolSavings, and DoubleClick.

Utility Business Model

From the word itself, these businesses rely on profound user utility of either the product or service or both. Such a model is also called on-demand business model wherein revenue is based on the extent of usage of the product or service. These businesses make use of the pay as you go concept. Shashdot and Amazon Instant Video are two of the examples of this business model.

Manufacturer Business Model

Manufacturer business model is also called the direct model.  These online businesses are the manufacturers of the goods themselves that choose to create a corporate site that also doubles as a transaction-based website. Apart from compressing its own distribution channel, it also reaches the buyers directly. Some examples are Hewlett Packard and Dell.

Merchant Business Model

When I say merchant, these are the wholesalers and the retailers of different products and/or services. Some of these online business owners opt to provide these through an auction (or bidding) while some choose to use list prices. Amazon and Barnes & Noble can be also considered as merchant businesses. Other examples are iTunes and Land’s End.

Subscription Business Model

Again, from the name of the model itself, these online businesses charge users a fee in return for subscribing to the service(s). Charges are periodic like daily, monthly, quarterly or yearly. Common examples are TRUSTe, AOL, NetFlix, Classmates and Listen.

Conclusion

These are only 9 business models although I considered the 10th business model as the combination of one or more of these business models. Take Amazon for example. Currently, it utilizes the affiliate, brokerage, and merchant business models. Or maybe, the 10th model is any of these business models though with slight variations.

Which business model are you using? Can you write it down and explain what your business is doing to be profitable? If you can answer these questions clearly, then you will have a good foundation and framework for monetization.

For more details about each model visit Professor Rappa’s website at http://digitalenterprise.org/models/models.html.

Footnote:

Michael Rappa. Business Models On The Web.
http://digitalenterprise.org/models/models.html. 2010