Mumbai University > Information Technology > Sem 7 > e-commerce and e-business

Marks: 10M

Year: May 2016

Revenue models

Revenue models specifically describe different techniques for generation of income. For existing companies, revenue models have mainly been based upon the income from sales of products or services. This may be either for selling direct from the manufacturer or supplier of the service or through an intermediary that will take a cut of the selling price. Both of these revenue models are, of course, still crucial in online trading. There may, however, be options for other methods of generating revenue; perhaps a manufacturer may be able to sell advertising space or sell digital services that were not previously possible.

Calculating revenue for an online business:

Site owners can develop models (above Figure) of potential revenue depending on the mix of revenue-generating techniques from the four main revenue options they use on the site given in the options above.

The model will be based on assumptions about the level of traffic and number of pages viewed plus the interaction with different types of ad unit. Their ability to maximize revenue will be based on these factors which can be modelled in the spreadsheet shown in (belowFigure) Number and size of ad unit:

This is a delicate balance between the number of ad units in each site section or page — too many obtrusive ad units may present a bad experience for site users, too few will reduce revenue. (below Figure)has a parameter for the number of ad units or containers in each ad revenue category. There is a tension with advertisers who know that the awareness and response they generate from their ads is maximized when they are as large as practical and in prominent placements. Many online newspaper sites such as the New York Times (www.nytimes.com) or London Times (www.timesonline.co.uk) will tend to display ads to the top and right of the screen where they will not interfere too much with reading the articles. A more accurate revenue model would develop revenue for different page types such as the home page and different page categories, e.g. the money or travel sections of a newspaper.

Capacity to sell advertising:

Figure 2.15 also has a parameter for the percentage of ad inven-tory sold in each category — for example, for the CPM ad display revenue only 40% of inventory may be sold. This is why you may see publisher sites such as PT.com with their own (house ads' — it is a sign they have been unable to sell all their ad space. A benefit of using the Google AdSense publisher programme is that inventory is commonly all used.

Fee levels negotiated for different advertising models:

These will depend on the market competition or demand for advertising space from advertisers. For 'pay-per-performance' advertising options such as the CPC and CPA models, it also depends on the response. In the first case, the site owner only receives revenue when the ad is clicked upon and in the second case, the site owner only receives revenue when the ad is clicked upon and a product is purchased on the destination merchant site.

Traffic volumes:

More visitors equate to more opportunities to generate revenue through serving more pages (which helps with CPM based advertising) or more clicks to third-party sites (which helps generate revenue from CPC and CPA deals).

Visitor engagement: The longer visitors stay on a site (its 'stickiness'), the more page views that will accumulate, which again gives more opportunities for ad revenue. For a destination site a typical number of page views per visit would be in the range 5 to 10, but for a social network, media site or community the figure could be greater than 30.

Considering all of these approaches to revenue generation together, the site owner will seek to use the best combination of these techniques to maximize the revenue. An illustration of this approach is shown in Figure.