The internet is a place that’s full of possibilities but only if you know what you’re doing. Many people start websites but don’t have an online business model that they can rely on from the beginning.
It goes something like this:
- Test out ads
- Dabble in affiliate marketing
- Try to launch a course
- See if people will pay for consulting
If you want breakout success sooner rather than later, it’s important to settle on the right business model from the beginning. That way, you’ll be able to make informed decisions to grow your business.
Keep in mind that we may receive commissions when you click our links and make purchases. However, this does not impact our comparisons and recommendations. We try our best to keep things fair and balanced, in order to help you make the best choice for you.
In this post, we’re diving deep into what online business models are, multiple types, and the pros/cons of each one.
What is an online business model?
Business model can be defined as:
The way an organization creates, distributes, and captures value within an economic context.
Put another way, it’s the methodology behind how you create products, get those products in front of the right people, and how you collect payment.
An online business model is the same thing but it’s done online. The business model you choose will determine how you’re able to sell your products and even how much you can make from those products created.
For example, if you choose to use ads for your business model then you probably wouldn’t be able to use paid acquisition to get people to your website. The unit economics would be difficult to justify and the whole system could easily break if ad costs increase. You’d be forced to stick to low-cost marketing channels.
On the other end of the spectrum, high-end consultants could easily pay over $1,000 to acquire a customer. Each new customer may be worth more than $10,000 in profit to them.
Let’s look at the business models available online today.
10 Online business models
Advertising is one of the most common online business models and it’s where most people start out online. All you have to do is insert a few lines of code in your header and strategic places on your website and ads will start showing to visitors.
The problem is that advertising requires a large number of visitors for it to be worthwhile. For example, an advertising network like Google AdSense may pay you $5 for every 1,000 visitors. In order to make $100/m, you’d need to get at least 20,000 visitors to your website a month. If you wanted to turn that into $1,000 then you’d need 200,000 visitors a month.
With some of the other business models, 200,000 visitors a month would equal a million-dollar brand. There are times when you can broker deals directly with brands which will increase your earnings. Most people that use advertising to generate income also use alternative business models together with it.
- Easy to get started
- Low maintenance
- Multiple ad networks to choose from
- You need large amounts of traffic to produce a high income
- The payout for impressions is low
Affiliate marketing is the process of promoting another company or product in exchange for a commission on the sale. It’s almost as easy as advertising and if you have high commission products, you may be able to use paid advertising to accelerate your growth.
The challenge with affiliate marketing is choosing the right niche. Once you’ve done that, you’ll know which affiliate networks to join and what products to promote. Each company/network sets its own commission rates which is dependent on the company’s cost of fulfillment and profit margins.
For example, if you’re promoting a software company like WebinarJam or Unbounce, you can expect commissions of anywhere from 20% to 50%. With physical products, that commission can be as low as 1% – 2% but courses can be over 50%.
- Easy to get started
- Higher income means you can explore multiple traffic acquisition strategies
- Large number of vendors and affiliate networks are available
- Can earn a lot with a relatively small amount of traffic
- Some networks have abysmal commission rates
- Some places have stringent acceptance policies
- Your niche may not work well with affiliate marketing or have enough vendors
Dropshipping or drop servicing
Both dropshipping and drop servicing are relatively new business models – even when compared to other online business models.
Dropshipping is when you sell physical products but don’t hold inventory or fulfill the order. In essence, you’re a middleman that marks up the products of another supplier. The end-user – your customer – doesn’t know you don’t own or ship the products.
You’re still responsible for customer support and ensuring that your customer gets the product. If your supplier doesn’t ship then you’ll be on the hook for the refund.
Drop servicing is similar but instead of physical products, you’re promoting services. You don’t fulfill the service but instead, get contractors to do it on your behalf. You can use freelancing platforms like Fiverr or Upwork to find talent to fulfill your services.
the drop servicing or dropshipping model is ideal because you don’t have the challenges of storing slow-moving inventory or paying staff during down months.
It can be tricky as well. Since you don’t hold inventory or directly employ the service providers, you can’t guarantee the quality of the products. It may be difficult to build a brand as a result.
- Low startup costs
- Not in responsible for core business functions like staff and inventory
- Can scale services or product business much faster
- Can’t always control the quality of the products or services
- Can be difficult to find reliable contractors that will deliver quality services/products
It’s estimated that the global eCommerce industry is worth over 4 trillion dollars and it’s showing no signs of slowing down. eCommerce is simply the retail industry but online. That includes selling things like electronics, clothes, toys, etc.
Keep in mind that software, courses, digital books, etc. are technically under eCommerce but they’re categorized differently to emphasize the physical nature of the word eCommerce.
eCommerce is appealing because you can skip the overhead associated with a physical location, start with a smaller budget, and quickly grow the business. The downside is that you’re responsible for fulfillment and ensuring you manage your supply chains properly.
Many online businesses have used eCommerce to catapult themselves forward and they now maintain both an online and offline presence.
- Can appeal to a massive market
- Control the quality of your products
- Build a real brand around what you’re selling
- Almost limitless growth potential
- You’re responsible for fulfillment and managing inventory
- Though less expensive than retail, it still requires considerable start-up capital
Traditionally, software has been sold as a one-off purchase. You’d get support for a few years and then the next version would come out. If you wanted to upgrade, you’d have to pay a reduced fee for access.
The problem with this model is that many people wouldn’t upgrade and you’d be stuck supporting much older versions of your product.
Software as a service is when you sell access to software on a recurring basis. That could be every month, year, or other time intervals. All of your customers are on the same version of your product and as soon as they stop paying, they no longer have access to it.
This model can be extremely powerful because it removes many of the hurdles associated with traditional software but also introduces new ones. You don’t recoup your costs upfront like with a one-off sale. Instead, it’s spread out over multiple payments.
With KyLeads, my software company, different acquisition channels have different payback periods and we optimize for the channels with the shortest period.
- It can scale to millions of dollars quickly
- You don’t have to maintain older versions of the software
- Users pay at regular intervals to maintain access to the software
- The more users, the cheaper it is to deliver the solution to them
- It’s expensive to develop software
- Since customers are paying monthly, they can cancel at any time
- It takes more time to recoup the cost of acquisition from new customers
Recurring membership model
This is similar to SaaS based on the recurring subscription but, instead of software, you’re charging people every month for information. This is a beautiful online business model because it costs you almost nothing but your time.
A recurring membership site charges a recurring subscription for access to some kind of training program or community.
The value in the membership site is that you’re constantly adding and updating the material. Keep in mind that a membership site will meet its natural limit and, eventually, old members will receive maximum value. This is when churn starts so you’ll constantly be looking for new members.
- Predictable revenue from paying members
- Build a loyal following
- Much of the customer acquisition process can be automated
- Have to constantly add more content to keep the members engaged
- Have relatively low price points
The eLearning industry has quietly grown to billions of dollars a year in revenue. Bloggers, large organizations, and small businesses alike are using digital courses to train staff, grow revenue, and better position themselves in the market.
An online course is simply a guided prerecorded training program (which may have some interactive elements with the instructor) delivered and accessed online. It can cover almost any topic imaginable and is only limited by what people are willing to pay for.
It’s the perfect way to monetize your knowledge and expertise without having to create new content every single week. You’re also able to sell it for a premium of $1,000 or more and there are even platforms that allow you to get started for free. To maximize the revenue of this online business model, consider creating limited access periods for your course.
For example, you can launch a course for a week and then close the cart for another six months.
- Don’t need many customers to make a sizeable revenue
- It doesn’t cost much to produce an online course
- Once created, you don’t need to update it often (unless you choose a topic like social media)
- Your course doesn’t have to be huge to be considered valuable
- Have to be great at marketing to sell higher ticket courses
- It can be difficult to figure out exactly what to put in and exclude from your course
- There’s a real possibility that people won’t want the course you’ve created
This business model may be one of the fastest ways to generate income online. You don’t need a website, an audience, or even much cash. All that’s necessary is a bit of determination and you can close a $1,000/m consulting gig in a few days.
Consulting is the process of giving professional advice to people in a technical, professional, or business role. Your advice is valuable so you’re paid accordingly.
The key here is that you do have to be a real expert. Otherwise, your consulting clients won’t get value and you won’t get a referral. I use the term expert loosely. In reality, expert just means you have more experience than the person you’re advising.
- Don’t need much startup capital
- You don’t need a website or even past clients
- It can start producing revenue within a few weeks
- You do need a verifiable level of expertise
- It can be difficult to grow it beyond a certain point
Lead Generation for other companies
Every business needs leads in one form or another and this business model could be ideal if you understand the nuances of paid advertising or creating compelling offers.
Lead generation is the process of getting people to submit their contact information in exchange for something valuable. This business model works by selling that contact information to other businesses that need it.
This may sound shady but it’s not. You may do it often like when you fill out a survey at a comparison site for car insurance. They sell your information to many of the brands that they recommend.
Some industries like law firms and real estate companies pay a lot for leads because each one can be so valuable to them. Companies like consumer software brands would pay a lot less because each customer is worth less.
- Simple to get started
- Don’t need a lot of startup capital if you know what you’re doing
- Can contract with multiple businesses
- Many people won’t submit contact information because they don’t want it sold
- If you’re not used to lead generation you can waste a lot of time or spend a lot of money
Rank and Rent
This online business model consists of you ranking website on the top of search engines for keywords related to local business services. You then rent out that digital real estate to service providers in the area targeted.
For example, you may build a small website related to plumbers in Atlanta then rank the website at the top of search engines for “plumbers in Atlanta.” Once there, you rent it out to a plumbing company in Atlanta so they can get the business the website generates.
Depending on the type of service you’re targeting, you can rent the site for anywhere between $500 and $2500 a month.
- Once you have the site ranking, it can stay there for extended periods
- There’s a ready market of buyers
- It can take time to get a brand new website to rank at the top of search engines
- Some websites may never rank because Google can be fickle at times
What to consider when choosing a business model
Use the following three criteria to vet the different business models.
What are you already good at and what can you learn easily? If you don’t know the first thing about SEO, you’d likely avoid the rank and rent business model. Conversely, you don’t necessarily need to know much about software before you launch a SaaS company.
Look at what you’re good at and what the business requires to succeed. If those two things are in line then it may be worthy of deeper consideration.
The timeframe you have
This is important. Not all business models are designed to start producing cash quickly. Some of them take a considerable amount of time. For example, before you earn a sizeable income from advertising, you need a lot of traffic.
That’s not done overnight.
With consulting. You can start pulling in thousands of dollars a month within a month. All you need to do is create a killer offer and sell it to the people that want it.
Available resources (human resources and money)
Finally, think about how much you have to invest in the online business model you’re choosing. If you have little or no resources then SaaS may be out of the question because it costs a lot to develop quality software.
Affiliate marketing or advertising may not cost much to get started but tend to take longer to ramp up. If you don’t have many resources then your choices will be limited but if you do have considerable resources then you can pick almost any of these business models.
Even though you choose a specific online business model to start, that doesn’t mean you can’t pivot after a certain amount of time. Many publishers that monetize with advertising move into affiliate marketing and eventually selling courses.
Many eCommerce brands have branched out into other services to add value to their customers.
The business model you choose in the beginning will be your major revenue stream for a while but that doesn’t mean you can’t diversify later. This guide is here to help you get clarity and understand what to expect with each of the business models.
Beyond that, you’re free to do as you choose. It’s your business.
Daniel Ndukwu is the CoFounder of Growth Boost and the Founder of KyLeads. He brings extensive digital marketing experience to the table and enjoys helping people on their entrepreneurial journey. When not creating internet-first brands, he spends as much time as he can with his family.