The majority of people online aren’t on the Internet to make money. Instead, they use the Internet for things like entertainment, news, games, and keeping up with friends and family.
However, for those who want to want to start a business, the Internet is a great place to look. It’s a relatively new, growing area that still has tons of potential. Because of its newness, there are almost certainly new sources of revenue still to be discovered and explored. It’s never been easier or cheaper to start a business.
With that said, there are a number of common models that have developed. Each have their tradeoffs with regards to risk and reward, which we’ll compare below.
1. Advertising
Advertising was one of the first business models to develop on the Internet, given it’s long history on paper, radio and television. In the early days, ads were sold like they are on television. They were generally sold on highly popular destination sites, with the goal of being in front of as many eyes as possible.
Google was one of the first to really take advertising to a new place on the Internet. By using peoples’ search queries they were able to target ads better than ever before, while simultaneously reducing the barrier of entry for companies looking to advertise by only charging an advertiser when a user clicked on their ad.
You don’t need to be a search engine to make money from advertising. Indeed, in many cases advertising is the de-facto model for converting a large number of users into revenue. Be careful though: part of Google’s success was that people come to a search engine looking for something, and if an ad gives them what they want, they’ll click it. On many sites, users aren’t necessarily looking for anything, and click-thru rates can be notoriously low.
Investment: Medium. Building a website, hosting it and marketing it requires some capital. However, the idea is to start making money soon after you launch, and hopefully make a return on your investment within a short amount of time.
Odds of success: Medium. As shown in the Google example, there is the potential for a lot of revenue in advertising, but it’s also a notoriously difficult market for websites. Getting a lot of traffic is key here. It also requires you to essentially become an advertising company, which means your real customers are your advertisers, not your users.
Potential return: Medium. It’s very difficult see huge profits from advertising. You’re basically a middleman between other companies and their potential customers, and there’s a limit to how much companies will spend on adveritising. Companies that depend on advertising are also very prone to swings in revenue, as advertising budgets are often the first thing to be cut when times get tough.
2. Promoting an existing product or service
In this case, you already have a business with a source of revenue, be it a restaurant or a law firm. Creating a presence online can be a great way to dramatically expand your customer base.
What’s great about this is that if you’re a profitable business, then you have a proven track record. On the other hand, if you don’t already have a business, starting an offline business can be very expensive (buying property, getting licenses, etc).
Investment: Medium. Again, the main investment is building and marketing the site. However, if you already have a profitable product or service, then you should already have the capital to create an online presence.
Odds of success: Medium to High. What’s key is marketing properly. Simply putting up a webpage doesn’t guarantee new business. On the other hand, keen marketing can make your revenues explode. A great example of this is Wine Library, which started as a New Jersey liquor store and came a $50 million dollar business thanks to the marketing of Gary Vaynerchuck.
Potential return: Low to Medium. While there are certainly cases where a small but successful company can go on the Internet and exponentially increase their revenue by going from local to global, you’re also opening yourself up to a lot more competition. But if your competition isn’t online yet (or isn’t competing effectively online), it’s a great way to get some new customers.
3. Selling an online product or service
The difference here is that you’re creating something new, and usually something that only exists on the Internet. An example of an online product is an eBook, while an online service might be a dating site.
There’s a lot of money changing hands on the Internet these days, and the more businesses and individuals depend on the Internet, the more need they have for other services and products. Subscription models are popular here, where customers keep paying as long as they get the desired service.
Investment: Medium to High. All the costs that exist in the cases above exist here, but multiplied. Not only do you need to create a compelling website, it needs to be so compelling that people will actually give you their money. Similarly, your marketing needs to be good enough to actually convince people to buy your product instead of just going to your site.
Odds of success: Low to Medium. Certain kinds of online businesses can do quite well for themselves. In particular, doing business with other businesses (B2B) is a growing online market. 37signals is a pioneer and great example of this kind of company. Be careful though, as consumers are traditionally loathe to part ways with their hard earned money for an online service.
Potential return: Medium to High. A successful online business can easily make tens or hundreds of millions of dollars a year. The key is to be scalable. In other words, being able to grow from 100 customers to 10,000 customers while remaining profitable. One of the nice things about the Internet is that there’s less friction holding back your growth (you don’t need to spend $10 million on a new factory, for example)
4. Be acquired by another company, or go public
This a trend that’s been exemplified by some high profile acquisitions made a few companies including Google, Yahoo and Microsoft. Since the dot-com era, Internet IPOs are much less common, and there are a lot startups whose main goal is to be bought out by a bigger company. It doesn’t always have to be a billion dollar acquisition by Google; there are many small (under $1 million) acquisitions made by medium sized companies.
This is a risky model to say the least. There are many factors that cause an acquisition to take place, most of which are out of the control of a small business. While Google might acquire your company because it creates synergy with their products, they also might purchase a competitor or just build your product themselves.
Investment: Very High. It’s very unlikely that you will be acquired without having a large number of existing users and/or a proven track record. This means not only building your business and marketing it, but sustaining it and growing it to the point where another company finds value in what you’re doing. You almost certainly need outside investments to get you to this point, which means angel funding or more likely venture funding. This opens up a new set of challenges as you now need to market your business to an investor.
Odds of success: Very Low. For every very public example like YouTube (which Google acquired for $1.2 billion) there are countless unseen examples of failed companies who never see the big payday and run out of money trying.
Potential return: Very High. If you’re one of the lucky examples, you can easily make tens of millions (or more). But remember the odds of this happening are low. Make sure you’re willing to take a big risk for a potentially big reward.
5. Get traffic/users, then choose one or more of the above
This is a bit of a side case that doesn’t exactly compare to the examples above, but is worth mentioning nonetheless. There are a growing number of companies that launch without figuring out how they will make money.
The idea is to focus on getting a large number of users, and that when that happens, making money from those users is comparatively “easy”. Twitter is a high profile example of this, having only recently starting to announce a business model. When the time comes, any of the above models can be considered.
Investment: High. Outside funding (angel or venture) is almost certainly required.
Odds of success: This is hard to say, as the market hasn’t really played itself out for this one. My personal opinion is that the odds are still very low, because outside funding means that investors will want a big return, and it’s unlikely advertising will do that. This means one of two things. Either you come up a really great paid service, and even then you’re at a disadvantage as you now have to either convince people to pay for something that used to be free, or create a really good new idea that people will pay for. The other option is to look for an acquisition, which is also risky as discussed above.
Potential return: High. If you’re able to get a large number of users, you get to start with a big customer base. Or if you sell the company, you can possibly get a nice payday.
If you want help building a business, or just want to discuss a potential business, please contact us — online business is our passion!
