Thoughts on Web Monetization

Tuesday, December 1st, 2009 5:49 pm

As the brainchild of academics and scientists, the web has always been valued for its open accessibility. The entrepreneurs who initiated the first dot com boom embraced this philosophy and strayed away from traditional revenue models, relying instead on indirect monetization methods such as ads. While that helped bring the web into the mainstream, it has had unintended consequences that persist to this day, both for web companies and other industries.

The advantage to the open approach was that the number of Internet users grew exponentially in a short period of time and hundreds of startups were able to create innovative and valuable resources without the constant burden of generating real revenue. The trade-off is that web monetization methods are still very limited, with a consumer base that feels entitled to use everything online for free, no matter how valuable the service or resource.

In the old days, if I wanted to read the news, I’d have to buy a newspaper. If I wanted to send mail, I’d have to buy a stamp, and if I wanted to make a long distance phone call, I’d have to pay 10 cents a minute. We had to buy software from Microsoft and Adobe. The revenue models were very straightforward – you paid for what you used. The web changed all of that. Now you can read the news, send e-mail, and make calls on Skype for free. Paying for software is unheard of in the era of Google Docs. Thus, industries that rely on more traditional business models can’t compete against comparable services that are free, so some of them, like publishing, are in serious turmoil.

The problem is that the web isn’t replacing old revenue models with new, more viable ones. Here are the primary ways in which web monetization can happen:

  • Ads – sites charge advertisers based on the number of views (CPM) or click-throughs. The problem with this approach is that you basically need around a million page views a month before you start making even marginal revenue. Every publishing site, such as CNN.com or NYTimes.com, uses this model.
  • Freemium – users can access the basic service or resource for free, but in order to get additional features they have to pay for them. This is popular with online games, but doesn’t work very well elsewhere. The NYTimes tried to charge for special online content with TimesSelect, and that failed miserably.
  • Transactional – the site facilitates some kind of transaction and takes a small cut for it. eBay and PayPal are good examples of this model.
  • Subscription – users pay a monthly or annual fee to access a site. This model typically works for dating sites.

While all of these can be viable revenue generation methods, some may not apply to the business idea at hand and others require building up a lot of traffic or a membership base in a short period of time for them to be effective sources of revenue. It’s important to be realistic when projecting revenues for cash flow.

The challenge for entrepreneurs in this space is simple. ¬†Instead of writing business plans just based on very cool ideas that have very little chance of making money, it’s imperative to start with a viable revenue generation model and build the concept with it in tandem. Short-term recurring revenue is ideal, but at a minimum there should be some solid planning for monetization before launching the venture. Otherwise the web as a business platform will continue to be unsustainable for many entrepreneurs.

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