I’ve mentioned “Business Models” a few times now, I even have a category of posts under the name, but what is a Business Model?
A model is something you use to depict or understand something much bigger. So remember in Return of the Jedi, when they are planning their attack on the Death Star, they view a holographic projection of what it looks like, well that was a model. Now a business may or may not be as complicated as the Death Star, but regardless it should have a model to describe how it works, who it sells to and so on – though it probably won’t be holographic!
Broadly speaking then a business model is a short description of how a business generates its revenues. This is different to a business plan which is anything but short, and tends to the very specific. Since we are going to be classifying web business models, we’re going to make this very broad indeed. So below are seven major categories of Web Business Models and we’ll look at each one in detail over the next few days…
The Advertising Model
The advertising business model is thanks in no small part to Google the predominant model on the web. A business will provide content, services or even products usually for free, then place advertisements to generate revenues. The advertisements come in many forms including text, graphic, flash, video, interstetial and graphic ads.
Traditional implementations of the advertising model include just about any blog, community, magazine or portal you can think of.
Some less conventional implementations are things like classifieds and directory sites where the user actually wishes to browse the ads (as opposed to more disruptive forms where they are interrupting normal content).
And cutting edge implementations include blog review services (such as ReviewMe and PayPerPost), AdBrite’s new image advertising service or a service like agloco.
The Merchant Model
The merchant business model is perhaps the most straight forward and is simply when the business sells goods – either electronic or physical – through some sort of web interface.
Traditional implementations of the merchant model are sites like Amazon.com or buy.com
And a more cutting edge implementation would be a service like iTunes
The Speculation Model
The speculation business model is based on buying web assets and selling them for profit. The assets might be domains, traffic or even whole sites.
A traditional implementation of this model is the purchase of domain names to resell them later at a profit as the domain market becomes tighter or a company finds itself in dire enough need of a domain to warrant paying a premium. Domainers often profit off the domains through selling ad space off domains in the meantime.
Another implementation of this model is what is known as arbitrage, that is a business purchases traffic from a service like AdWords and then speculates that the traffic will in turn click on advertisements at a higher advertising payoff than they were bought.
The Subscription Model
The subscription business model is when a site provides continuous content, products or services for a recurring payment.
Implementations of the subscription model include web hosting and internet providers, software providers like 37Signals and content providers like ShutterStock.com
The Brokerage Model
The brokerage business model covers businesses that facilitate transactions between two parties for either a flat fee or a percentage of the transaction.
Implementations of the brokerage model cover things like auction brokers such as eBay, marketplace brokers such as iStockPhoto and transaction brokers such as Escrow.com or PayPal.com
The Donation Model
The donation business model is based on users donating to the organization to help towards operation costs. Donation models are used in shareware and open source software, as well as in non-profit sites like Wikipedia.org
The Referral Model
The referral or affiliate business model relies on other businesses providing programs to pay out for referrals to their business. The primary business will then set up specialised content sites or tools to direct users to their affiliates.
Implementations of this model can be found on a content site such as JohnChow.com as well as from more sophisticated tools and services sites like hotelclub.com where users are channeled off to partner providers.
Other models exist, however these are perhaps the most common and widely used. If you can think of some examples that don’t readily fit into these categories, leave a comment and let me know.
More on Business Models
There are far more technical definitions of Business Models – the sort of thing you would encounter in a management course – which categorize up the components and label them in specific ways. You can view such a definition here. And there are some very loose definitions of the term, such as this one from Clarke – “A useful interpretation of the term ‘business model’ is therefore that it is the answer to the question ‘Who pays what, to whom, and why?’ “.
Michael Rappa has done a good job of categorizing web business models in his article “Business Models on the Web” which is both extensive and worth reading and on which this classification is based.