10 Business Models to Monetize Web Applications

By Rob Diana of Regular Geek (Twitter/FriendFeed)

During my morning reading, The Long Tail had a link to a survey of Web app business models. If you take a look at the charts listing the revenue models, you will see there are twenty models listed. However, that is not an exhaustive list of ways to make money. Some of the models, such as Fixed and Variable Subscriptions, have several "implementations" that you can attempt.

Having said this, why is it that monetization is so hard for many Web 2.0 applications? Let's look at what needs to be done to support the various business models.

Subscriptions

1. Fixed subscriptions are a simple concept where people pay monthly fee for a product or service. Typically, you can charge for removing advertisements or some level of premium features. The problems with fixed subscriptions are that you need to create a subscription payment system and you need something to charge for. The first issue can be rectified by integrating with something like PayPal. The second issue is what most sites have difficulty with, what do you charge for? Premium content or features are much harder to find as you want to ensure you can build as large an audience as possible. Premium features need to be really interesting, and generally not available for free elsewhere.

2. Variable subscriptions are much more interesting. These are things like charging for use of an API or data feed. These are difficult as it requires a large amount of tracking application usage, and the pricing plans are more difficult to administer. Again, there are the questions of whether your services are generally available for free or even that useful.

Third Party Support

3. Advertising is the most common form of third party support. However, most Web applications are not launching with advertisements, which I think is a mistake. Google AdSense may not help you make millions, but maybe it offsets the costs a little bit and it opens up opportunities for real advertisements in the future.

4. Sponsor is a glorified word for really nice advertiser. A sponsor typically has a permanent advertisement on the site. These are nice, but it typically requires a decent amount of traffic in order to attract one.

5. Paid content is the black sheep of third party support and generally vilified by bloggers. The amount of negative publicity that you could receive from paid content may not be worth the money, especially if your site is still young. I would definitely recommend against this unless you are an established blogger and can easily defend your position.

Products And Pay-Per-Use

6. Products and Pay-Per-Use are probably the hardest monetization models to use. Do you have a physical product or virtual product that you can sell? Are people even willing to buy your product? Products typically require a significant amount of capital to develop or purchase, so your costs are generally high as well. Pay-per-use models are also difficult to develop. PayPal is an excellent example, where they charge transaction fees for each transaction. Just like the variable subscriptions, tracking of application usage can be difficult and for transaction fees, there is a large amount of financial work involved. Most technical people do not have significant financial background, so there is a large knowledge obstacle to overcome.

Services

7. Branding tends to be a side effect of what you have tried to do with your application. However, there is good money to be made from consulting and speaking engagements. This is an interesting option, but it tends to be more of a personal option as opposed to monetizing your application directly.

8. Create a platform. This is part of the model for the iPhone. You can charge developers for the development kit. This is immensely difficult to do because your platform must be hugely popular. Twitter is becoming a platform, but has been so open with their API that they would have difficulty charging people at this point. With this option, you should start charging immediately when it is released.

9. Affiliate sales are also an interesting option and do not require a huge amount of initial work. The difficulty with affiliate sales is that you still have to create something that is worth buying. I would also think that the amount of revenue possible from affiliate sales is smaller than most people creating Web applications would want. Granted, I do not have experience with this model, but you are sharing revenue with the people who are your affiliates. You could create a larger sales network in this way, but people would have to want to sell your product.

10. White label services do not appear very often for some reason. This is similar to the platform model, but the difference is that your software is not obviously at the forefront of the product. Ning is the most widely known option in the social network space, but there is a significant amount of competition. This model also requires some portion of other models as well. Ning has fixed monthly subscriptions as well as variable usage subscriptions. You could avoid mixing models by charging a larger fee for the initial creation of the white label service, but a larger initial payment will also scare potential buyers away.

Obviously, this list is not complete, but these basic models can be implemented or even integrated into most applications. I have avoided the "holy grail" of internet applications, selling the entire startup, as there is no direct way to implement this. It is also ridiculously difficult to survive without any monetization and be purchased for a decent amount of money. Most potential acquirers would like to see some semblance of revenue and potential revenue before buying something. It does help to be the hot application in the hot industry, i.e. YouTube or Twitter, but there are very few opportunities to do that and there will be tons of competition.

Read more by Rob Diana at RegularGeek.com.

Be a Real Friend to Your Social Networking "Friends"

Not every single contact you make online is somebody you would want to spend time with in real life. While you might be following thousands of people and making new "friends" on Facebook, LinkedIn, Twitter, FriendFeed and all the other networks, you would likely hesitate before sending them an open invitation to your home. But I've personally seen many examples of people I've known online crossing the chasm and operating in the world once reserved for classmates, colleagues, fellow church members and family. What might have started out as a casual acquaintance, or connection through similar interests can easily transform to one where you can connect in a more personal way.

The debate of labeling such a contact a "friend" is not new. Mark Dykeman, in a post on Mashable, asked in September, Is a Social Media Friend Really a Friend?, asking, "Would you trust a social media friend with your money? Your home? Your significant other? Your children? Your life?"

The answer of course is not uniform. Each example listed above has a certain weight of importance, and implied risk. But even if you don't want to casually hand your keys and credit cards over to somebody you have been throwing sheep at on Facebook for two weeks doesn't mean you can't find real connections with people who will help you out.

A few examples:

1. Would you invite a friend you met online to "crash" at your place for a few nights instead of finding a hotel?
2. Would you refer a friend you met online to a job position you found, and introduce them as a trusted candidate?
3. Would you purchase a product and ship it to an online friend in another state without getting paid up front?
4. Would you pay the phone/Internet/electrical bill for an online friend who you knew was short on cash?
5. Would you split a hotel room with an online friend at a conference even if you'd never met?

I use these examples because they are all things I've either done or had done by friends of mine online.

For example, although I had looked high and low for a Nintendo Wii Fit throughout the Bay Area, and on Amazon.com, I had no success in finding one. (See my complaining on FriendFeed) But Jesse Stay, who has been a blogger here over the last two months, and someone I got to know on multiple social networks, let me know his mother has a knack for tracking down the evasive products. Sure enough, on Halloween day, a box came to my office, containing the Wii Fit, and displaying the address of Mrs. Stay, from Massachusetts. My wife and I are now amusing ourselves in acting like we're going to use the Fit to pursue something resembling an exercise program.

In the age of PayPal, pushing money around also has become easier, assuming you have it. If you watch people's comments on Twitter and other networks closely enough, you can sense stress, or, when there are gaps, know if something has impacted their usual schedule. Sometimes, it's a money issue, and reaching out via PayPal, or making a call to the utility that's getting in their way can give them the breathing room to keep going as they were before. I'm not suggesting you start playing charity and laying out thousands of dollars, but in the time where you can lend a helping hand, we've reached the point where online acquaintances are just as deserving as those offline. And if you ask them to pay you back is of course up to you.

Similarly, way back in 2001 a friend I knew from an Apple online stock board said he wanted to fly out to see the MacWorld Expo, but he didn't have a place to stay. Having never met him, I offered my apartment for three nights, and he and I took off to see Steve Jobs in person. I also shared a room at the recent BlogWorld Expo with someone I'd never met.

Why so trusting? A few things. First, I believe people are inherently good, and I've chosen to interact with good people online, who share ideas, are trustworthy and positive to be around. Robert Scoble says "you are defined by who you follow" and if I were following people online that I wouldn't be friends with in the real world, then that is my mistake. You also, thanks to the ease of publishing and dissemination of opinion, have the option of publicly embarrassing or outing an individual who has wronged you, so the incentive to do well and act within accepted guidelines is strong.

Of course, not every friend is equal. Just because almost 2,600 people have chosen to follow my account on Twitter doesn't mean that I am going to give them cash and a place to stay. But for those who I have had many interactions with over time in multiple networks, and traded e-mail or phone calls with, I know I am building relationships that have a potential to transition to real world. That's why I know at some point, I am going to take my wife out and let Drew Olanoff babysit my twins, why I bet my kids will be having playdates with Milan Scoble and Thomas Buchheit, and why I've tried to help find new careers for many people whose blogs I read and whose work I follow. These investments I'm making now are going to be paying off, and I encourage you to take a look at your own online "friends" and see if you too can be a real-world friend to them.