E-commerce Revenue Models

A firm’s revenue model describes how the firm will earn revenue, gener­ate profits, and produce a superior return on investment. Although many e-commerce revenue models have been developed, most companies rely on one, or some combination, of the following six revenue models: advertising, sales, subscription, free/freemium, transaction fee, and affiliate.

1. Advertising Revenue Model

In the advertising revenue model, a website generates revenue by attract­ing a large audience of visitors who can then be exposed to advertisements. The advertising model is the most widely used revenue model in e-commerce, and arguably, without advertising revenues, the web would be a vastly differ­ent experience from what it is now because people would be asked to pay for access to content. Content on the web—everything from news to videos and opinions—is free to visitors because advertisers pay the production and dis­tribution costs in return for the right to expose visitors to ads. Companies will spend an estimated $125 billion on online advertising in 2019 (in the form of a paid message on a website, paid search listing, video, app, game, or other on­line medium, such as instant messaging). About $90 billion of this will be for mobile ads. Mobile ads will account for 72 percent of all digital advertising. In the past five years, advertisers have increased online spending and cut outlays on traditional channels such as radio and newspapers. In 2019, online advertis­ing will grow at 18 percent and constitute about 53 percent of all advertising in the United States (eMarketer, 2018g).

Websites with the largest viewership or that attract a highly specialized, dif­ferentiated viewership and are able to retain user attention (stickiness) can charge higher advertising rates. Yahoo, for instance, derives nearly all its rev­enue from display ads (banner ads), video ads, and, to a lesser extent, search engine text ads. Google and Facebook derive well over 90 percent of their rev­enue from advertising, including selling keywords (AdWords), selling ad spaces (AdSense), and selling display ad spaces to advertisers. Facebook alone displays one-third of the trillion display ads shown on all sites in 2019.

2. Sales Revenue Model

In the sales revenue model, companies derive revenue by selling goods, in­formation, or services to customers. Companies such as Amazon (which sells books, music, and other products), LLBean.com, and Gap.com all have sales revenue models. Content providers make money by charging for downloads of entire files such as music tracks (iTunes Store) or books or for download­ing music and/or video streams (Hulu.com TV shows). Apple has pioneered and strengthened the acceptance of micropayments. Micropayment systems provide content providers with a cost-effective method for processing high vol­umes of very small monetary transactions (anywhere from 25 cents to $5.00 per transaction). The largest micropayment system on the web is Apple’s iTunes Store, which has more than 1 billion customers worldwide who purchase indi­vidual music tracks for 99 cents and feature-length movies for various prices.

3. Subscription Revenue Model

In the subscription revenue model, a website offering content or services charges a subscription fee for access to some or all of its offerings on an on­going basis. Content providers often use this revenue model. For instance, the online version of Consumer Reports provides access to premium content, such as detailed ratings, reviews, and recommendations, only to subscribers for a $35.00 annual fee. Netflix is one of the most successful subscriber sites with over 100 million customers worldwide in 2018. To be successful, the subscription model requires the content to be perceived as differentiated, having high added value, and not readily available elsewhere or easily replicated. Other companies offering content or services online on a subscription basis include Match.com (dating services), Ancestry.com (genealogy research), and Microsoft Xbox Live.

4. Free/Freemium Revenue Model

In the free/freemium revenue model, firms offer basic services or content for free and charge a premium for advanced or special features. For example, Google offers free applications but charges for premium services. Pandora, the subscription radio service, offers a free service with limited play time and ad­vertising and a premium service with unlimited play. The idea is to attract very large audiences with free services and then convert some of this audience to pay a subscription for premium services. One problem with this model is converting people from being freeloaders into paying customers. “Free” can be a powerful model for losing money. None of the freemium music streaming sites have earned a profit to date. Nevertheless, they are finding that free ser­vice with ad revenue is more profitable than the paid subscriber part of their business.

5. Transaction Fee Revenue Model

In the transaction fee revenue model, a company receives a fee for enabling or executing a transaction. For example, eBay provides an online auction mar­ketplace and receives a small transaction fee from a seller if the seller is suc­cessful in selling an item. E*Trade, an online stockbroker, receives transaction fees each time it executes a stock transaction on behalf of a customer. The transaction revenue model enjoys wide acceptance in part because the true cost of using the platform is not immediately apparent to the user.

Online financial services, from banking to payment systems, rely on a transaction fee model. While online banking and services are dominated by large banks with millions of customers, start-up financial technology firms, also known as FinTech firms, have grown rapidly to compete with banks for peer-to-peer (P2P), bill payment, money transfer, lending, crowdsourcing, fi­nancial advice, and account aggregation services. The largest growth in FinTech has involved P2P payment services, such as Venmo and Square, two among hundreds of FinTech firms competing in this space with banks and online pay­ment giants such as PayPal (PayPal purchased Venmo in 2013). FinTech firms are typically not profitable and are often bought out by larger financial service firms for their technology and customer base.

6. Affiliate Revenue Model

In the affiliate revenue model, websites (called affiliate websites) send visi­tors to other websites in return for a referral fee or percentage of the revenue from any resulting sales. Referral fees are also referred to as lead generation fees. For example, MyPoints makes money by connecting companies to po­tential customers by offering special deals to its members. When members take advantage of an offer and make a purchase, they earn points they can redeem for free products and services, and MyPoints receives a referral fee. Community feedback sites such as Epinions and Yelp receive much of their revenue from steering potential customers to websites where they make a pur­chase. Amazon uses affiliates that steer business to the Amazon website by placing the Amazon logo on their blogs. Personal blogs often contain display ads as part of affiliate programs. Some bloggers are paid directly by manufac­turers, or receive free products, for speaking highly of products and providing links to sales channels.

Source: Laudon Kenneth C., Laudon Jane Price (2020), Management Information Systems: Managing the Digital Firm, Pearson; 16^th edition.