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SMART ANSWERS
By Karen E. Klein
FEBRUARY 21, 2000


Is Customer Data the Web Company's Real Asset?

The second of two articles on how people are trying to make money on the Web

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See the First Smart Answers Column on Web Revenue Models:

The Would-Be Entrepreneur's Revelation: The Web has No Profits!


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S.L., a baffled would-be Netrepreneur from Stockton, Calif., wrote to Business Week frontier Online recently to ask how people make money from the Web, since few sites seem to be selling anything. That led to a two-part response on different models for making money on the Web.

(see Smart Answers, Feb.17, 2000, "The Would-Be Web Entrepreneur's Revelation: 'The Internet Has No Profits!' " )

A:  Congratulations on your insight. A lot of people are confused about how these companies make money -- and in fact, many of the best known Web sites are not profitable, especially those that don't sell products or charge for their information. So, why are stock prices soaring for service companies, such as search engines and Web portals? Why do venture capitalists line up to invest in them? On one level, experts say, there's the hype factor that goes along with new technology and the high-flying bull market. Even the most optimistic admit that there will be consolidation in the Web sector. "Investment money is going to deflate at some point on companies that are overhyped and inflated by Wall Street," says Rob Frankel, an Internet marketing and branding consultant.

Though how they do it isn't obvious, service Web sites do generate revenues and theoretically should be able to turn a profit at some point. "Nothing is for free. 'Free services' are provided to grab 'eyeballs' to sell to advertisers, traffic to sell products, or [the public's interest so they can] be acquired, merge, or go public," says Don Sussis, an e-commerce consultant whose firm, Interested.com, is based in New York City.

The most common way that Web sites make money is by selling advertising, usually in the form of banner ads that materialize when you open a page, or "sponsorships," where a company pays to be associated -- by posting its logo or other marketing material -- with a particularly germane section of a Web site.

High-traffic, low-specificity Web sites such as search engines may charge their advertisers $10 to $20 CPM (cost per thousand, i.e. per 1,000 ad impressions) and still make money because they generate millions of page views every day. Niche sites, such as high-profile financial sites that give quality content on specific topics, can charge in the range of $100 to $300 CPM because they get repeat visitors and deliver a targeted audience.

Another common Web revenue model is something of a hybrid -- sites sell products as well as advertising. They may also act as exchanges (i.e. auction sites) for clients to sell something, and they take a percentage of the sales or charge listing fees.

Search engines may also license their content to other search engines and make money that way. Or they may charge fees to companies that want their listings highlighted. Sites with affiliate programs essentially turn other sites into sales reps for a small commission. An affiliate site has a button that lets a visitor go elsewhere to buy merchandise. Affiliates get a commission on anything their visitors buy from that site. The button generates revenue and is considered a marketing plus for the site that hosts it.

Many consultants feel that the real money-making potential of the Web -- mining detailed customer data for resale -- has not yet been fully realized. This is also an increasingly controversial business because of actual and potential abuses of private information. Many consumers are already wary of shopping online for this reason, and there is pressure on legislators and governments to regulate the sale of personal data. When customers register on a site, the personal information they divulge is stored, parsed, analyzed, and often sold, unless customers "opt-out" -- refuse to allow its use or sale. The detailed demographics and information on buying habits and personal interests are a gold mine for companies that want to do niche marketing.

"That data -- from your age, income, location, preferred hobbies...to buying habits, interests, etc. -- is incredibly valuable to a wide range of companies," says Jonathan Hirshon, whose Silicon Valley public-relations firm represents many large Web companies.

When you consider that an auto manufacturer spends $300 to $400 in advertising and marketing on every person who simply walks into one of its showrooms, the data that a Web site has on a single registered user might be worth hundreds of dollars, Frankel estimates. And if a site has 1 million registered users, it could sell and resell its demographic data on them for years. That's one factor behind the high stock valuations, says consultant Frankel. "Data is the crude oil of the new century -- the better the data, the more valuable the company is. That's where the real money is, not in short-term revenue, but in narrowing the shot that advertisers will have at the people they're interested in reaching."


Have a question about running your business? Ask our small-business experts. Send us an E-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.



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