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
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
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."
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