Andrew Chen Archives

My sister’s boyfriend and future in-law Sachin asks:

Andrew,

I was curious what your thoughts were on viable consumer services business models.

I
know everyone talks about monetizing a site through display\text ads on
the site. And many sites seem to be going that way. But then there are
what business week calls fremium, where you have a basic free site and
users pay for a premium service, like flickr. Last night we also talked
about real estate\car sites being all about lead generation and selling
those leads to the appropriate sellers. I’ve heard in casual\mobile
device gaming the idea is to sell the games for a couple of bucks each.

What else is out there? What works?

Sachin

First of all, I want to razz the guy: Sachin works at Microsoft and loves it – so naturally I want to point out that he uses ‘\’ rather than ‘/’ like a normal human being. Shame on you Sachin. Also, don’t wear your badge outside of the Microsoft campus :)

Anyway, down to business: I actually brainstormed a big list of these and wrote them all down at one point, but I seem to have lost it. Oh well. I’ll just list a bunch off the top of my head and see how it goes. I’ll focus completely on business models for consumer-facing sites, since they seem more interesting.

• Advertising (text ads, banner ads, lead generation)
• Subscription fees (dating sites, "fremium" like Flickr)
• Traditional retail (Amazon, iTunes, etc.)
• Transactional fees (eBay, PayPal, etc.)
• … anything else?

Am I missing anything? Anyway, there are lots and lots of variations of this stuff. For example, within Advertising, you have text ads and banner ads, but you also have co-registration. Co-reg is what happens when you enter in your name, address, etc. as part of signing up for a site, and then that info gets swapped with other business entities and potentially sold as a lead. Obviously it’s different than something as simple as a banner ad, but it’s essentially the same thing – helping advertisers identify useful people and then selling those people to them.

Advertising is clearly the most common version since it’s the only one that really seems "free." Obviously it’s great to double-dip as well, and have ads for normal users, and then sell additional features for more money.

Probably the most interesting way to think of this sort of thing is to overlay these abstract monetization approaches to a particular kind of website. Then, you could drill down and get more tactical with specific products and features that support each monetization strategy. (It’d look like a 2-D table of all sorts of different options within each cell)

For example, if you were monetizing a social networking site, you might imagine that you could combine text ads with using the profile information your users give you as lead generation information. You might make it easy to opt into offers or subscriptions for brands they are already loyal to. Or target ads more effectively through their profile info. For subscriptions, you could charge them for advanced features of the site, such as more pictures or functionality. I really like the model of CyWorld and others which ask people to pay for "expressions" or little custom widgets they can put in different places. I suppose that would be one version of Retail. You might also look for transactional opportunities within the social network, such as places where people might want to swap goods or buy/sell things. Then you can start charging listing fees or be part of the settlement process. Etc.

The real creativity is in looking at the assets and user population that you have, and see how you can weave in monetization techniques without alienating the user. Or the subtle tradeoff in "teasing" the user with features and then monetizing them in the backend. For example, casual gaming is based on giving away the demo for free, but then getting them to convert by buying it. Well, why that model instead of charging upfront? Or integrating ads into it and making it all free? Etc.

This seems similar to what happens in the movie industry, where the question is: How do you integrate product placement without making it too alien or over-the-top? But if you can do this successfully, it’s a great money spigot since all your users are pushing themselves towards monetizing. Obviously eBay is the most successful example of a runaway train in this regard.

UPDATE: I was googling and found a nice little list – slightly academic, but still interesting nonetheless.

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