Making money from Web 2.0
There are two repeated questions about Web 2.0:
- What is it?
- How do you make money from it?
There is plenty around to answer number 1 (appropriately, the Wikipedia definition provides a good explanation), but here is a pocket-sized look at making dough from web 2.0.
web 2.0 revenue model characteristics
Forget traditional business principles, web 2.0 is different:
- Relying upon the tail of the market, rather than the head. Would you rather have 2 clients with a million dollars each or 2 million clients with a dollar each? On the surface, it is the same amount of money but one option gives you a community, credibility, free advertising and low risk. The other option is high risk and you still only have 2 clients.
- Flexible. For the first time in business, a revenue model might be different tomorrow than it was today - with nothing to lose.
- Vacant. If the luxury can be afforded (and often it can) then apply the revenue model later. After all, you want the as many users as possible so just wait until the community is active and work out the most efficient way to monetize it then.
Although the potential for revenue is huge, it is often nothing at all. Web 2.0 applications with no revenue coming in eventually either dissolve or are acquired. The latter proves that the value in a successful web application is not how much revenue is coming in, but the strength of a user base with associated meta data (user ratings, comments etc).
This is highly useful marketing information, especially for the lucrative Generation Y audience. YouTube is the most popular case study, having never made any money and being bought for $1.65b USD. This is not because it offers a vast database of videos, but a vast (and I mean vast, take a look at these 2006 stats) database of information about who likes what and why. This allows for more effective advertising and a powerful marketing platform.
popular web 2.0 revenue models
Subscription
Description: User pays a re-occurring fee that allows advanced functionality or services.
Examples: Flickr, Box.net, Basecamp
Pros: Low-touch revenue, re-occurring,
Cons: Raised user expectations, requires features that people on-mass are willing to pay for.
Clip-the-ticket
Description: In a marketplace environment a fee (usually percentage based) goes to the provider.
Pros: Low-touch revenue, re-occurring,
Cons: Some direct costs involved (i.e. e-commerce gateway may have fees already like Visa), small profit margin, relies on high quantity of transactions
Advertising
Description: Advertisements are placed on web pages, revenue generated by Cost Per Click (CPC), Cost Per Impression (CPM) or Cost Per Action (CPA).
Pros: Excludes user from paying anything, high scalability.
Cons: Can cheapen sites, works best with high traffic and high content.
Pay-per-use (credit system)
Description: Users pay a fee or perform a task (e.g. completing a survey) to obtain credits (real or virtual currency) that can be spent on one-off activities (e.g. a phone call).
Examples: Skype, Second Life
Pros: Revenue is generated in advance of costs to take from it (can therefore make a lot of money in interest), control over the exchange rate, high predictability of use.
Cons: Virtual economies can fail easily, easy to compete with if things are a set price.
Stat selling
Description: Information about user habits is sold as marketing intelligence.
Examples: YouTube, Myspace (arguably)
Pros: Huge value, larger the userbase the higher the value, can reach certain demographics more than any other means.
Cons: Privacy, requires careful foundation setup to gather appropriate data
Exit only
Description: A community is created with the intention of selling it so that a revenue model can be applied later.
Pros: Potentially huge value, keeps focus on the community not making money
Cons: Risky, requires startup funds
what next for web 2.0 monetization
Of course all these models are very down the line, there are numerous more out there, and I’d love to hear about them if anyone knows of some interesting ones. Although advertising has certainly dominated web success in both measures of revenue and take-up, it is early days for other models to face judgement in the market.
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Sep 24th, 2008
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