Online business model revenue gap

Everyone is abuzz regarding the sustainable income models for online companies – mostly advertising and paid services. Wherever you look, you see huge gaps between income from both consumers and corporate customers and the cost base of quality businesses. Downturn in ad revenues has made this even more visible from my last posting in January, to which this posting is a continuation. Some companies talk about going fully subscription based – both startups as well as huge corporations. Ad-supported and freemium models seem to work for just the selected few largest world players. In most niches as well as country-specific services, the two ends just don’t meet.

Currently probably over 90% of services and content online is ad-supported, but it can not stay that way. In print, advertising vs subscriptions + newsstand income has varied in different markets and niches, but has been more toward 50/50% or 60/40%. I don’t see a way for online subscription models to grow to cover the gap from 90% to 40-50%, which is now missing. And no, neither smart nor stupid VC’s and angels will cover that, which they unfortunately or fortunately have been doing until now. That’s I believe today the biggest startup opportunity: which business models and processes will be there to cover the revenue gap in business models. At least 40-50% of online business income does not exist yet. What is your solution going to be? Which income sources will there be in addition to current ones?

The latest research regarding subscriptions is not promising. Forrester research says 80% would just find another service and just 20% would pay. PaidContent research showed just 5% of readers would be willing to pay. For most online services, conversion rates fluctuate between 1-5%, making it viable only for services with millions of users. I have been a fan of paid services for quite some time and still believe we will see more of them over the years to come. Still we must agree with the simple fact: most people won’t pay for anything online any time soon.

Mobile will be huge in coming years. We will see better monetization via app and in-app purchases there. Mobile does not mean just small handsets. It means netbooks, tablets, e-readers, special 6-10 inch access screens, car terminals etc – all with wifi and 3G/4G access. We will be sligthly more willing to pay on those devices, just because of habits. Unfortunately the amounts paid per person per month will not be huge, probably around 5-15 EUR. People have their limits. Also still most won’t pay. That means the revenues even compared to current ad revenues will be somewhat marginal. For mobile we will also see even less advertising. The screen space is limited – no space for ads. Our time on mobile will be limited – not full office days, but 1-2 hours per day max. Most people will also opt for only a few top sites and apps on mobile, much less than on PC’s. Mobile should grow to 10-20% of income streams. For startups – both intermediaries and consumer facing businesses – this will be a great sector to focus on from now on, but it does not solve fully the revenue gap problems for most service and content providers.

In advertising we continue to have many problems. Last ad models favor few selected sites (most notably search engines) and neglect the others in earlier stages of the marketing tunnel. Most ad models are oriented on direct response models, forgetting about the attention and interest generation stages of marketing models. Direct response models (like search ads) again work for just a few, but are not a solution for most marketing budgets to come online for branding and awareness generation. Currently no good news on that front, until all sides come back to basic understanding of the larger marketing management process. It will take time.

Sponsored income stream marketplaces

People hate ads. People hate to pay. They still want content and services. Just someone else should pay. But who?

Companies and marketers have budgets online and these will be increasing. The biggest problem today is not the direct response / click & action oriented field, which already works quite well. One of the questions is mass market marketing, reaching a lot of non-customers, just getting the word out, fast and to big audiences. While display ads still work for many – even without the clicks – other marketing models must emerge. New methods like everything around social marketing is also oriented towards the end of marketing process tunnel, and it’s also not the fastest marketing action out there.

Advertising in general is companies paying for services consumers use. Why not make that more clear to the people and have them their action part in it?

How about having companies who do not fit the direct response, social marketing and display advertising models just pay for content and online services of private consumers in exchange for getting their name, brands and products in front of people? The main question is having a very strong connection between getting the service and understanding of it being paid for you by a selected company. Soft sponsorships, logos, display ads just won’t make a difference in comparision with current display ads.

One way to do this is sponsorship markets, where people in a way receive favors, almost like gift cards, from a marketplace of sponsors. It’s not just one company paying for content or services or subscriptions, but consumers having a choice who their sponsor is. Think Facebook fan pages meet offers and affiliates. There are huge problems with scam schemes to work out there and it won’t be easy. Still it’s worth to explore it further. Facebook might do this, but so could smaller startups. Initially it will be more between parties which are well established, so there are less risks for scams. As time advances, more smaller companies can join to receive money from large sponsors to cover their costs in exchange for promotion to their subscribers.

One caveat is, it won’t work purely trying to do it the direct response way, with sponsors being paid on a CPC/CPA basis or getting registration data of the subscribers. There must be a way to bring the marketing tunnel/model first stage dollars, not the last stage money into this.

This has been done in a way of sponsorships in some cases today, but it has been inefficient until now. It’s not automated, transparent or measurable. These are the parts that must be worked into the model.

In addition to that or instead of it, what is your suggestion to cover the current income gaps for startups and media?

4 Comments

  1. What do you think about virtual goods? This morning I bough a virtual “present” from Facebook for a friend who has birthday today (cost – $1). And I’ve spent about a grand total of $40 for some ridiculous FarmVille goods. I might be stupid for buying this kind of stuff but these companies are actually making money from it.

  2. Yes, agreed, biggest problem of internet is that everybody take is “free” as granted. In bobile, true, habits are better, people are more ready to pay.

  3. Virtual goods will continue to be an important revenue source, but only for some, where they are appropriate. For example, I can not imagine these to be big in search engines or newspapers. Virtual goods will be big in games, social fun apps etc.

  4. EPL.ee is currently selling physical goods like car tires in their web-shop and it’s perfectly normal, so what stops them adding virtual goods to the selection as well?

    For example they could sell virtual “folders” with cat pictures (Hello Kitty etc.) or similar on it where people could store different kind of information – like interesting articles or comments. You can do the same with browser bookmarks but browser bookmarks doesn’t have cat pictures on them.

    Anyhow, the possibilites are endless. Selling folders that have cat labels on them won’t save Estonian media from bankruptcy but it’s not up to me to come up with the correct solutions anyway, it was just an example.

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