Online Business Models: Understanding How Websites Make Money
Whether its an idea, an opinion, a product, a service, or something else, every website is “selling” something.
Websites often generate income through the following sources:
- Products – Sites such as Amazon, Jet.com, TigerDirect, Woot! and others act as digital storefronts, combining the traditionally separate distributor/retailer roles in the supply chain with goods going from the producer to the hybrid distributor/retailer (or “e-tailer”) and then to consumers. Others (including Amazon mentioned above) also create their own content, cutting out all of the middlemen and entirely becoming their own supply chain. Those that exclusively sell digital content save on warehousing and distribution costs, making their business model even leaner and meaner.
- Services – Some sites offer free and premium digital services such as WordPress, Facebook, Twitter, LinkedIn, Monster, CareerBuilder, YouTube, MailChimp, etc. These services may also be combined with the third and most-popular method for making money on the web…
- Advertising – Like Television and Radio, websites also generate income from advertising. If you’ve ever heard of Google, Bing, or Yahoo, you know that these are search engines, the gateways to the rest of the internet, and they primarily make their money from advertising. In TV and Radio, the broadcasting networks spend money to create (or purchase) content in the form of shows that are distributed via broadcast. Advertisers pay the networks to insert ads (commercials) during breaks in the content. Likewise, site-owners either produce, buy, or generate content and then also insert advertising.
Advertising Revenue by Media
Radio and TV stations generate advertising revenue through broadcast advertising and marketing promotions such as pub crawls, van hits, contests, and other events. Because reaching a local audience is what local stations do best, their primary advertisers are local businesses. Larger networks can reach a national or even global audience and therefore tend to attract national and global advertisers like Coca-Cola, Nike, McDonald’s, etc.
Websites can reach anyone anywhere in the world with an internet connection but the audience first has to find them. This brings us to Google.
Google is successful at advertising because it serves as the largest “online portal” (or directory) to the rest of the internet and requires no in-house generated content. The search results ARE the content. Using web analytics and special search algorithms, Google can assist advertisers in reaching their target demographics like no other. Google makes money because it helps others make money and is thus able to use its influence to direct the evolution of the web.
Total internet advertising revenue in the United States totaled a record-breaking $59.6 billion in 2015, an increase of 20.4% over the previous year (i.e. +$10 Billion). For comparison, all of Broadcast Television made only $40.6 Billion, Cable TV brought in $25.7 Billion, Video Games made $1.1 Billion, and Hollywood generated less than a billion dollars. How did all that money get generated on the internet?
Methods of Online Advertising
Let’s break down that $59.6 Billion Dollars…
- Internet Search – Sites like Google and Bing make their money by displaying text and graphical ads to people searching for things on the internet.
- Display/Banner Ads – Most websites generate revenue by displaying graphical ads on their webpages. The Internet Advertising Bureau (IAB) creates universal guidelines for sizes and formats.
- Mobile – Advertising that caters to mobile phones and tablet devices including Apps, Games, and Lockscreens featuring advertisements.
- Digital Video – Sites like YouTube and Vimeo generate their revenue by inserting ads to user-created video content and sharing a portion of that revenue.
- Classifieds – Sites like Craigslist and Ebay Classifieds make their money from classified ads just like the newspaper industry.
Online advertising uses the Internet to deliver promotional marketing messages to consumers. It includes email marketing, search engine marketing, social media marketing, many types of display advertising (including web banner advertising), and mobile advertising.
Like other advertising media, online advertising frequently involves:
- A publisher – a site-owner that charges a fee to integrate advertisements into its online content
- An advertiser – a person or company that pays for the advertisements to be displayed
Other potential participants include:
- Advertising agencies – Companies that specialize in creating, planning, and handling advertising including developing marketing and branding strategies for their clients.
- Ad servers – Companies (like Google and Bing) that deliver ads to participating websites (“advertising affiliates”) for a share of the ad revenue.
2018 Update: The IAB says online advertising reached $88B in 2017, a 21% increase over the previous year, surpassing broadcast and cable TV ad spending ($70.1B) for the first time. Already comprising the majority of the pie, mobile advertising rose to 57% ($49.9B) with digital video ($11.9B), mobile video ($6.2B), and social media ($22.2B) rounding out much of the rest.
2019 Update: Digital advertising revenue reached a record-breaking $49.5 billion in just the first half of 2018.
Display Advertising Models: Click vs Look
For display advertising (i.e. text, banner ads, and rich media), the two most prominent methods of delivery are CPC and CPM.
CPC: Cost-Per-Click (AKA Pay-Per-Click or PPC)
Cost-per-click, or CPC, is a performance-based business model meaning that the advertiser pays the publisher each time one of their ads is clicked. In other words, the advertiser is paying for visitors to be sent to their website from the publisher’s website (and/or affiliate sites). The most obvious reason for an advertiser to select a CPC advertising campaign is that you are only charged when people click on your ads and each click is measurable via web analytics, making an ad campaign’s success or failure obvious.
Here are a few things to know about CPC:
- Interactive (must be clicked)
- Success or failure is immediately measurable through web analytics
- Advertisers pay nothing for ads served that do not generate clicks
- Unpredictable cost, you don’t know how many people will click
- Low Risk to the Advertiser, High Risk to the Ad Server/Publisher
- Can generate thousands of “impressions” or “page views” for free
- Advertisers prefer CPC to CPM campaigns
- Used by ad networks such as Google AdSense
CPM: Cost-Per-Thousand-Pageviews (AKA Cost-Per-Impression or CPI)
CPM, or cost per thousand (Roman Numeral “M”) impressions/pageviews, is an advertising model that people running tens, hundreds, or even thousands of ad combinations will often use. Under a CPM arrangement, the advertiser agrees to pay the publisher a predetermined amount for every 1,000 ad impressions or pageviews served. This effectively means that the publisher is compensated for every ad shown. This method is the most similar to the broadcasting industry.
Here are a few things to know about CPM pricing arrangements:
- Non-interactive (only pageloads are counted)
- Not effectively measurable, pageviews do not mean ads were seen
- Predictable cost, pre-determined before the campaign runs
- Low Risk to the Ad Server/Publisher, High Risk to the Advertiser
- Commonly used for “branding campaigns” where primary objective is to increase awareness of a company or product
CPM rates can often range from less than a dollar per pageview to three figures, meaning that showing 1,000 ads can generate a few cents in earnings or more than $100. That range is so wide because the composition of audiences from site to site varies dramatically. Sites that can offer access to targeted, valuable web traffic can command higher CPMs, while those catering to a broad, relatively unattractive audience will be able to command much less.
Note: Amazon announced on June 27th, 2018 that it would be phasing out CPM ads for its Amazon Associates program by November of that year.
The 3 R’s of Online Advertising
In order to judge the effectiveness of an online advertising campaign, advertisers pay attention to the 3 R’s of online advertising:
- Reach – The quantity of the audience you are reaching. Are you reaching enough people?
- Relevance – The quality of the audience you are reaching. Are you targeting the right demographic?
- Return-On-Investment – Are the benefits worth the cost? Are your goals being met?
Speaking of Google… AdWords vs AdSense
As you’ve learned by now, Google is synonymous with the internet, especially online advertising. Here’s what you need to know:
- The Google AdWords program (now Google Ads) enables advertisers to create ads that will appear on relevant Google search results pages and affiliate websites.
- The Google AdSense program is an affiliate network that delivers Google AdWords ads to individuals’ websites (like yours!). Google then pays website owners (like you!) for the ads displayed on their site based on CPC or CPM rates.