When you start a for-profit business, a key part of your plan is how to generate revenue. Many companies sell goods, services or a combination of the two. Online businesses and media companies often look to advertisers for most or all of their revenue. This is known as an advertising-based revenue model.
Chicken or Egg
As a service-driven online business, you can typically make money by charging users for the services or information you provide, or by attracting users and selling advertising to companies that want to reach them. Charging customers a fee is often a more stable way to ensure you make money. However, offering anything for free tends to generate more traffic and interest, which is what leads to higher-earning potential with advertisers.
Online media sites and publishers commonly use the ad-based revenue model because it is difficult to get users to pay for content that they can find for free in most cases. Thus, the basic premise is to present news, information or feature articles that attract users and then sell advertising space to businesses that have a message for your audience. Online service providers with in-demand services such as music or picture editing often have more flexibility in that they can make money from paying customers or attract advertisers.
Strengths and Weaknesses
Offering free content or services, especially when it interests a very targeted market segment, can lead to excellent ad revenue opportunities. Sponsors are often willing to pay more to reach a select audience. Ad revenue also allows you to profit from offering solutions that have limited demand from paying customers. Ad models are often harder to predict, though. Your traffic may remain steady, but advertisers may come and go based on economic and industry factors. You also may miss opportunities to get fees from customers who are willing to pay them.
You can deliver advertising in a couple of ways. Selling ads directly to sponsors often means the highest ad dollars, though you either need a significant presence or strong selling abilities to attract advertisers directly. A common option used by online companies is third-party ad platforms. These are businesses that serve as go-betweens for advertisers and publishers or site owners. You essentially set up an account, place ads and collect revenue based on exposure or clicks to your on-site ads. You don't have to manage the ads this way, though you give up some revenue to the third-party service provider.