The 7 Types of Online Business Model

If you’re interested in acquiring an online business there are several e-business models to choose from and you should carefully evaluate your options to find the one that best fits your skills, experience, time requirement and risk appetite. There are dozens if not hundreds of ways to make money online so here we have tried to classify the major monetisation strategies into seven categories of online business models.

The web advertising model is one the simplest and most popular e-businesses. It is the internet’s digital extension of the traditional media broadcast model. Effectively a website provides content, usually for free, interspersed with advertising messages in the form of banner ads or other ad placements. Naturally the value of this type of business is in the volume of traffic that the site has and usually the niche it is in. Content sites come in many forms including blogs, forums, news and informational sites etc. Webmasters of these sites have a range of advertising payout models to adopt:

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  Pay-Per-Click: advertising revenue is generated by users clicking on the web advertisement
  
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  Pay-Per-Lead: advertising revenue is generated when users click and sign up through a web advertisement
  
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  Pay-Per-Action: advertising revenue is generated when users click and purchase something through a web advertisement (the site owner receives an agreed % commission of the sale value)
  
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  Pay-Per-Impression: advertising revenue is generated by users viewing the web advertisement
  

High quality content sites with a strong traffic profile are typically very attractive to buyers as they offer relatively secure income with low maintenance requirements.

Pros

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  Simple monetisation model
  
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  Very low maintenance
  

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  Earnings are highly sensitive to traffic
  
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  Need continual supply of fresh content to attract traffic
  

An affiliate business model is one where the business exclusively sells other suppliers’ products and services in exchange for a commission payment that is an agreed percentage of each sale. Affiliate marketers are effectively independent sales entities that are paid on a performance basis (i.e. when an actual sale is made). Websites use tracking codes which identify who referred the sale to them. Some of the major affiliate programs include Clickbank, Amazon and Commission Junction. In most cases affiliate marketers receive c.50% of a sale but this can range from anywhere between 5% to 75% depending on the product and the niche. Successful affiliate marketing sites are ones that have become an authority product referrer, usually through building high quality content around the product or service being sold.

Pros

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  High margin (80%+)
  
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  No product/service creation required
  
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  Relatively low risk
  

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  Careful product selection required
  
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  Takes time to build authority
  

eCommerce has been a dominant theme of the internet for the last decade and is one of, if not the most common e-business model. By definition, eCommerce is buying and selling of products and services over the internet. There are different types of eCommerce sites depending on the approach to inventory and distribution taken.

A store approach requires the site owner to hold inventory, ship the product and effectively take control of the entire supply chain. More common is the dropship model where the eCommerce store acts as an online platform for selling goods but outsources the storage and shipping of the products to the original supplier. Naturally there is some margin reduction in a dropship model but it also cuts out the logistical burden of running a retail store and allows the owner to focus on internet marketing which is typically their core competence. Somewhere in between those two is the brokerage model which brings buyers and sellers together, facilitating but not actively participating in the transaction. Marketplaces like eBay and Fiverr are good examples of this.

eCommerce sites tend to be attractive to both online and offline investors as retail experience can often translate well into this model. The dropship approach is generally favoured as physical warehousing and responsibilities for logistics can for many outweigh the natural benefits of owning an online business. Buyers reviewing eCommerce businesses should focus on product margins, owner time involvement as well as traffic sources, trends and sustainability.

Pros

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  Easy to understand for offline investors
  
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  Dropship models incur no logistical obligations for the owner
  

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  Relatively low margin
  

Lead Generation business models are those where a website is used to attract traffic and convert users into leads for a sellable service (e.g. car insurance). Typically the site owner creates a website of relevant content for the lead-type and then employs an internet marketing strategy to attract traffic to the site. User information is collected (usually through a customer form) and then the lead data is sold to companies interested in marketing to or selling to those collected leads. The quality of the lead (contact information, conversion rate) will correlate heavily with the price paid.

An example of a lead generation business is LendingTree.com, where they use radio advertisements, Google Adwords, SEO, etc. to drive leads to the site and then sell these to banks and mortgage companies. Another good example is QuinnStreet. QuinnStreet works in a series of verticals to develop proprietary content sites, publisher partnerships, ad placements, email campaigns, etc. to develop a lead flow, and then sells that on to buyers at a higher price per lead than they are paying overall to acquire the leads.

The main focus with a lead generation business is establishing a higher revenue-per-lead than the total cost-per-lead. Owners of lead generation businesses can arbitrage paid traffic well if their conversion rate and RPL is higher than the CPC of running AdWords (or equivalent). Lead generation businesses can be very high margin (80%+ net margins) and relatively hands-off once established. Buyers reviewing lead generation businesses for potential acquisition should focus on traffic sources and sustainability, owner time involvement and of course conversion rates for both leads and sales.

Pros

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  Very high margins (80%+ net)
  
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  Relatively low maintenance
  

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  Need to maintain constant traffic and conversion rate
  
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  Keep updated with relevant content
  
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  Heavily vulnerable to commercial terms of lead buyers
  

The Subscription business model is where users are charged a periodic - daily, monthly or annual - fee to subscribe to a service, commonly a content offering (e.g. Netflix, Listen.com). A number of these businesses combine free content with "premium" (i.e. member-only) content. Often converting customers into long-term billing relationships requires time and effective marketing so many successful subscription models have a well-refined internet marketing strategy and conversion funnel in place.

Subscription businesses are attractive for online acquisitions as they typically employ a monthly or quarterly billing model and therefore enjoy a significant amount of recurring (vs. ‘one-off’) income which is held in high(er) regard. Acquirers should be focussed on the strength of the customer base, churn rate, customer lifetime value (‘CLV’) and the associated customer acquisition costs.

Pros

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  High level of recurring cash flow
  
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  Strong margins (50%+ net)
  

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  Strong marketing and conversion skillset required
  
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  Ongoing customer care / support requirements
  

Software businesses often spring up from hobbyists looking to create a relevant product within their niche. Usually the developer has created a niche software product and either opted to sell through word of mouth and referrals or to employ affiliates to sell it via an established partner network such as ClickBank. Software businesses can be set up with either one-time or subscription-payment types depending on the nature of the product and the customer base.

Buyers looking at software businesses should focus on the marketing strategy, traffic sources, quality and integrity of the software’s source code as well as technical requirements for future upgrades.

Pros

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  High margin (60%+) and often stable cash flow
  
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  Relatively low maintenance
  
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  Can employ affiliate model very effectively
  

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  Software updates may require technical experience
  
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  Small risk of piracy or copycats
  

Software as a Service or ‘SaaS’ is a business model where users pay a subscription to rent software hosted online instead of purchasing it outright and installing it locally on their computers. SaaS is at the core of centralised or cloud computing with the aim being that users can run their computer tools as online rented products. All of the processing work and file saving is conducted on the internet with users accessing their tools and files using a web browser.

Users benefit from reduced upfront cost of ownership, quick and easy access with immediate upgrades, no need for additional hardware and often much better technical support as well as customer care.

SaaS businesses are becoming increasingly popular for online acquisition as, like subscription businesses, they typically employ a monthly or quarterly billing model and enjoy a strong amount of recurring income. Again, acquirers should be focussed on the strength of the base, churn, CLV and customer acquisition costs. Often SaaS businesses are backed with a high amount of content marketing to get users into the conversion funnel and onto a subscription. They also require a strong technical support system in place for good customer care.

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  High level of recurring cash flow
  
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  Strong margins (50%+ net)
  

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  Technical updates associated with the software
  
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  High level of content marketing required
  
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  Need a strong support system in place for customer care