Types of Online Business Models

by WorkFromHome on June 16, 2012

Business ModelIt’s been said that the advent of online enterprises will dramatically change the way business is down around the world, upending traditional models of commerce in favor of radically new ideas and methods of completing transactions. As time has progressed, however, a different (and far less headline-grabbing) reality has actually occurred. That reality is one which has seen internet businesses fit neatly into traditional business models, with companies easily being categorized as brokers, merchants, advertisers, and other bricks-and-mortar groups. They’re certainly doing things in a new way, but their basic model of business has not changed.

With that being said, while the traditional models of business are still going as strong as ever, online businesses have revolutionized the character or those staid transactional groups. Advertisers, for instance, have become increasingly dependent on things like keywords and search rankings, while brokers have become more dependent on search boxes, online transactions, and direct consumer marketing. For those who are still skeptical that these innovative, internet-based businesses can be neatly categorized into traditional models, here’s a few examples of how the models remain, but the focus has shifted toward technology.

Advertising: An Increasingly Electronic, Targeted, and Keyword-Aware Business Model

It’s been the subject of five seasons of television’s “Mad Men,” and any astute viewer can easily identify how the advertising business model has changed dramatically over the last several decades. The pace of that change has only accelerated in the past fifteen years, as major search engines like Google and Yahoo have shifted the occupation’s focus from images and banners to keywords and statistics. In the world of online business and advertising, marketing and demographic targeting are increasingly popular.

The advertising business model has become increasingly self-aware, with companies now charging a fee not just for developing a company’s public image but also for targeting that image only to the consumers most likely to be interested. Indeed, consumers who have a pattern of searching for Apple articles, support, and features, will likely see a great deal more Apple advertising than Microsoft, Linux, or Android advertisements. As online businesses have turned into online advertising agencies, they’ve focused on a site’s content, search engine rank, and keyword relevancy. Every clever slogan is now rich with targeted keywords and demographic-friendly terminology that replaces the billboards, full-page ads, and classified advertisements of the past century.

The Merchant Model: Online is Now the Rule, Not the Exception

If a company doesn’t sell its products online, they probably aren’t selling very many products. In the world of online business, electronic storefronts have become as essential and popular as those based offline in traditional brick-and-mortar locations. In fact, they may be even more important than those traditional retail stores as they offer global reach, enhanced promotional opportunities, and new ways for consumers to discover a brand. The traditional merchant model has remained; it has evolved into a model that now has a dual focus to reach both online browsers and offline window shoppers.

Every day, new stores spring up online, selling anything form digital goods (known as “bit vendors” or “byte vendors”) to traditional merchandise, to “online-only” goods. Even traditional merchants have begun offering online exclusives to take their business into the digital age. If that isn’t the progression of the entire merchant model, surely nothing is.

Direct-to-Consumer Sales: Foregoing the Catalog in Favor of the Website

There was a time when the “Sears Catalog” was perhaps the most-anticipated arrival in the mail. This direct-to-consumer merchandising tool was full of exclusive items which could only be achieved by ordering directly from the Sears company and awaiting the arrival of a direct shipment to the home. This business model has, in fact, been strengthened by the progression of catalogs into direct-to-consumer online shopping websites.

If one considers the cost of mailing a large catalog — and most of those famous catalogs came in at several pounds, several times per year — to each interested consumer, and then removes that expense in favor of a single website which lists all products and can be updated without the printing and shipping expenses incurred in decades past, it’s easy to see why this direct-to-consumer shopping model has thrived in the 21st century. Businesses can now exist solely online, market their products directly, and ship them right from the company’s warehouse to the consumer with ridiculously low overhead that boosts corporate profits. This business model isn’t going anywhere, especially while site’s like L.L. Bean, NewEgg, Tiger Direct, Sears, and others continue to make big bucks from it.

Affiliate Business: Earning Money Through Referrals

Earning money through affiliations and referrals has always been around, with companies traditionally giving consumers a small cut of the profits on products and services they sell to their friends and families. In the online sphere of business, this business model has evolved into referral links, affiliate merchandising programs, and pay-per-click affiliate advertising links. While affiliate programs were some of the least-executed business models and applications in the traditional bricks-and-mortar business world, they are now one of the leading sources of secondary and even primary income for online entrepreneurs.

Far from an only-online model, though, affiliate earnings and referral links have actually been embraced by large retailers like Barnes and Noble, Apple, and Avon; online titans like Amazon, eBay, and GoDaddy have also embraced the practice. Working in tandem with targeted advertising and demographic information, it’s possible to turn these programs into a robust source of revenue that they simply never became in the offline world.

Communities: Fostering Relationships to Foster Profits

Perhaps the best example of a community-base business model is that of Weight Watchers, a group which offers a free “first meeting” to new members and then uses that relationship to sell them on the company’s monthly and annual subscription plans. Those meetings are based locally, with people who share the same interest, and they’ve led to solid profits and a long-lasting business for those behind the Weight Watchers enterprise.

The online evolution of this popular business model can actually be seen at Weight Watchers itself, which now offers an online-only subscription plan where subscribers can track their meals and interact with people “just like them” through discussion forums, blog posts, and other informative collaboration tools. Alongside this proven business model, community blogs, discussion forums, and even an online form of free (public) broadcasting have all become sources of great revenue and profits.

The Dying Newspaper and How it Revolutionized Subscriptions

It has often been considered the first business model to become extinct with the presence of online content and free information for the masses, but even the subscription-based content and services model has experienced a resurgence in recent months and years. Of course, that hasn’t come without a pretty high price. Newspapers, magazines, and other publications find themselves experience record low sales numbers and profits driven by their traditional print media, while the public has virtually forgotten that one used to have to pay to read the news, rather than simply load it up on a mobile device.

Amid this, though, there is the “pay wall” method of subscription service which is helping energize businesses of varying size, from the New York Times down to small, independent content creators on self-hosted magazine sites, weblogs, and content farms. Consumers can now certainly experience some content for free, but must pay for the privilege to read an entire newspaper on their computer or mobile device. Subscriptions remain valid, even as their transition into an online format remains experimental and cautious at best.

Speaking of Subscribers: Pay-Per-Use On the Rise Online and Off

Businesses can probably thank the trying economy for revitalizing on-demand serves and payment models, also known as “metered usage.” These business models are dedicated to charging a consumer for only the products they use, the videos they watch, or the articles they read. To that end, instead o a monthly fee, online serves often charge consumers a low digital video purchase or rental fee, or a per-article charge for enjoying online content from the world’s biggest publishers.

It is perhaps the easiest way to attract new business, and it’s easier to do than ever. Even content distribution systems like cable and fiber-optic television networks have gotten in on the act, reducing many of their premium monthly offerings to per-viewing fees. In an economy that has been less than idea for an extended period of time, charging consumers for what they do use, rather than what they might use, has led to a number of success content distribution companies based solely on the internet.

The Broker: Say Hello to Priceline, Hotwire, and Travelocity

There is likely no better way to emphasize the success of online brokerage than to simply ask consumers a simple question: When is the last time you used a travel agency to book a flight, hotel, train, bus, or rental car? The answer likely pre-dates the rise of online commerce and might cause some consumers to dig into receipts from the last century. That’s because online brokerage is one of the clearest examples of success in transitioning from bricks-and-mortar retail models to online-only transactions.

The most obvious example of this successful transition is that of the travel industry, which has moved from the small and stuffy offices of a travel agency onto the internet with extraordinary success. And the success of these businesses isn’t only good for the airlines, hotels, and travel agencies themselves. Consumers also experience a windfall when they experience the benefits of price competition. In travel alone, websites like Orbitz, Hotwire, Priceline, Cheap Tickets, and Kayak, all compete to offer consumers the lowest price on the same airlines, the cheapest stay at the same hotels, and the best prices on the same rental cars through the same rental agencies. Even if it’s just a few dollars of difference, consumers can save on their bills by comparing and contrasting with just the click of a mouse.

A further example of the success of online brokerage can be seen, quite literally, in online brokerages and stock trading agencies. It would have been unheard of just fifteen years ago to buy and trade stocks without an in-person consultation with a broker or financial advisor. But, sites like eTrade and Fidelity off all-online transactions that are actual cheaper and easier to place than those made with an offline broker. They allow consumers to do their own research and then, using a simple online interface, facilitate the transaction by matching a consumer’s needs with a remote broker who can make the deal a reality.

Finally, one final example of the success of online brokerage business models is that of the online auction broker. This is a field that was widely considered to be a dying breed in the days leading to the internet commerce revolution. Auctions were on the wane, and most people who needed to conduct an auction simply preferred to do it themselves since it wasn’t that difficult or time-consuming anyway. After all, when consumers go from hosting multiple auctions per week to one or two per month, the job is exceedingly easy to self-manage. Enter the internet an eBay, two tools which have changed the way auctions are conducted.

People are now free to conduct auctions and sell just about anything without leaving their home. This might sound easy, but the true power sellers need someone to manage their listing and transactions for them so that they can please a wide base of consumers on a regular — generally daily — basis. The return to prominence of the auction broker has been quick and stark, and is one of the great success of online business in turning a dying breed into a flush-with-cash comeback story.

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Plenty of Great Ways to Participate in the Online Business Revolution

Consumers have been hearing about the revolutionary way of doing business online for the better part of a decade, and almost all of these success stories focus on how something “radically changed” the way people do their everyday business. But the simple fact of the matter is that even today’s most digital businesses are participating in some of the most tried-and-true business models in the world. Those business models have lasted for centuries, and have withstood numerous challenges from developing technologies, and they’ve survived each of those challenges.

In the modern online marketplace, the key is not to revolutionize the way people do business, but rather to facilitate those transactions in an easier way using all of the technology available. The companies who get this are the ones who experience a rapid rise to success and high profits. eBay, for example, did not reinvent the auction. Indeed, time is still limited to secure a deal and people can be outbid in just a few minutes. Steals can be found right alongside overpriced items with too many bids. What eBay did, however, is take the auction form an auction house or private property into a globally-acessible arena. By increasing the number of people who could bid at any given time, and by encouraging a fully-electronic auctioneering process, they revived a dying industry and changed how people thought about it — not how it was done or what it stood for.

The same thing can be said of Amazon, which did not invent direct-to-consumer marketing. The website was, however, one of the first ones to employ an all-online marketplace with items that could be shipped all across the country. It was also one of the first so-called “catalog sites” to feature rare items, user-submitted used items, and grocery items that could be found for prices far less than those paid in offline stores. When consumers realized that this titan of online sales could provide them with the same products at a lower price, save them a trip to the local department store, and engage them in an electronic transaction, they were sold.

When Starting an Online Business, Remember the Models

The key thing for consumers to remember when they consider starting their own online business is that they must fit their enterprise within one of the established business models. Each of these ways of doing business has experienced repeated, long-term success in both the online and offline worlds. Consumers who wish to make a healthy profit by offering their services should work to “evolutionize,” rather than revolutionize the marketplace. Consumers gravitate toward what they know, and they enjoy a certain amount of familiarity when they buy their products online.

When businesses introduce customers to a familiar product or experience, but slightly modify that shopping experience using new and emerging technologies, consumers are more likely to respond in receptive and profit-generating ways. Remember, they key to business is familiarity and a good relationship. Working within existing business structures with a truly new product is a great way to use both of these characteristics to the advantage of the emerging business.

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