3 Internet companies and 13 Business Models

According to foreign media reports, Steven Carpenter, founder of Cake Financial, a US social Financial investment website, recently wrote an article on TechCrunch, a well-known technology blog, this paper discusses three types and 13 business models of Internet companies:

The focus of this article is not to guide a specific company on how to make a profit, but to analyze the general profit methods of internet startups (Note: This article refers to Internet companies for consumers. You can think of it as a guide to Internet business models. If you are currently thinking about creating your own startup, this will help you gain some knowledge about how to achieve annual revenue of $10 million. But the premise is that you have a good product that the market needs. (Before reading the list below, please note that they do not list all services and there will always be some exceptions .)

You can divide Internet companies into three categories. After learning about these three types of companies and 13 representative basic business models, you can understand 95% of Internet companies mentioned in TechCrunch. Good risk investors are very familiar with this knowledge, so before meeting investors, you must also understand your business and know how you can earn $10 million.

I want to express two key points: 1) Internet companies need to carry out different activities to obtain revenue; 2) it is not difficult to understand these activities.

Three types of Internet companies

As an Internet company, you are trying to attract potential customers by providing one or more of the following three products: 1) Media, 2) paid Service or Physical Commerce ). They are not mutually exclusive. startups can use one or more of them to obtain revenue. For example, media companies like LinkedIn make profits through advertising and paid services.

1. Media:

Media companies provide free content and collect the willingness to purchase so that they can sell advertisements and provide lead for products or services that may interest the audience ), you can also add subscription services or digital products. A large number of Internet Startups belong to this category, because these companies usually have the lowest startup costs, but their expansion costs are not low. Companies that create applications in the search, gaming, social networks, new media, video and audio fields, and lead generation fields are typical media companies.

2. Paid services:

If you provide a paid service, you will attract as many potential consumers as possible at the most cost-effective cost, enable them to pay for the services you provide, and then you will continue to pay for them as long as possible. Most startups in this category adopt a "value-added for free" strategy, that is, they provide basic content or services free of charge, hoping to convert a small portion of free users into paying users. "Value-added for free" is by no means the only way to get customers, but it is usually the most cost-effective means, when services are built on low-cost media or third-party infrastructure providers (such as Amazon S3), the variable cost of providing services to a new user is minimal.

Payment and financial service companies fall into this category because they provide some free or paid services and are charged proportionally for each transaction. The companies that provide paid subscription services, new banks or investment companies, and payment service companies are typical of this category. Compared with media companies, they usually need more funds to create companies, but the cost of expanding the scale may not be very expensive because they have the cash that the consumer pays to use.

3. Physical business:

If you are selling a product in a warehouse, you can send it through a courier company, or you can buy coupons for goods and services in the real world, then you are running a commerce company ). Such startups get revenue from each transaction, and they need to improve efficiency in warehousing, return and customer service, as well as sales and marketing.

13 Internet Business Models

When introducing each business model, I will talk about three to four key indicators and the scale required by the company to achieve annual revenue of $10 million. Of course, the company also needs to perform well in many other aspects, but these three to four indicators are the most important for the company to establish a sustainable business.

The 13 business models are ):

1. Search)

2. Games)

3. Social Network)

4. New Media)

5. Market)

6. Video)

7. Commerce)

8. Retail (Retail)

9. subscribe)

10. Audio (Music)

11. Lead Generation)

12. Hardware (Hardware)

13. Payment)

Type 1: Search

As a search company, you need to reach out to consumers looking for products and services as widely as possible. The more queries you can generate, the more likely users will click your paid link. The main indicators of such companies are:

* Independent Monthly visits (Monthly Uniques)

* Query volume Per Month (Queries Per Month)

* Percentage of users who click a paid link (Percentage of users that click a paid link)

* Revenue Per Click)

These indicators are mutually dependent. For example, the number of independent visits per month depends on the average revenue of each click. Suppose that in your company, 5% of searchers will click the paid link, and the average revenue for each click is 0.35 USD, then you need 2.5 million clicks each month to bring revenue, in order to obtain an annual revenue of $10 million. In this type, Hunch is a good example. It combines traditional search elements with new services (Hunch uses a personalized engine) to provide more accurate product recommendations, therefore, it has a higher conversion rate and revenue for each click.

Type 2: Game

Online gaming companies offer free game products, attracting a certain proportion of users to buy virtual items. Zynga adopted this business model. The main indicators of such businesses are:

* Average Monthly/Daily Users (Monthly/Daily Average Users)

* Payment user Conversion Rate (Conversion Rate to paying user, usually 1%-2%)

* Average Monthly user consumption (Average Monthly Spend)

To earn an annual revenue of $10 million, gaming companies must have at least 5 million users each month. Social game companies like Zynga and Nexon combine traditional media elements and business by replacing physical products with digital products.

Type 3: Social Networks

Social network companies create content around sharing experiences and shared interests. They can usually earn revenue from advertising and sponsors and make profits from paid services. Social websites such as MyYearbook and Dogster care about how many independent users are and how many ad impressions are displayed (Advertising Impression, which refers to an opportunity for Advertising information to reach out to audience members ), inventory (inventory, the total number of browsing times of the advertisement within a certain period of time), and the average rate paid by the advertiser. To make up for the usually low CPM (cost per thousand prints), these companies need millions of users and a high repurchase rate.

* Unique Visitors)

* Ad Impressions)

* Sales Rate (Sellthrough Rate, that is, the inventory Rate that has been sold)

* Cost per thousand marks (CPM)

Type 4: New Media Platform

Among all start-ups, the most difficult type to define is the most difficult to predict the final success or not, that is, the new media platform company. They are generally considered to be social network companies, but unlike the latter, such companies create content around the experience of new technology support. For example, Facebook, Twitter, and Foursquare, they need to change the current behavior and consumption method: Facebook provides a way to keep us updated on the latest situation in our social circle, twitter provides a way to interact directly with people in the news and the current event. Foursquare keeps us informed of the whereabouts of friends and family members.

* Independent user (Unique Users)

* Action (Actions, such as sending Twitter messages and signing in)

* Percentage of profits from the action (Percentage Monetizable)

* Cost per thousand marks (CPM)

* Cost of each action (CPA)

In this business model, key factors include: How many people your service can attract (including content creation and consumption ), how many people can you convince to change their behavior to create new content (status update, send Twitter information, sign-in), and the percentage of your profits from these new lines. If you can persuade people to use new tools and consume content, you may grow rapidly and earn $10 million with a small amount of money. The challenge for such companies is that they are usually hit-driven and winner-take-all companies that need a lot of money to expand their scale, they also need to persuade media planners and advertisers to invest money to create new forms of advertising.

Type 5: Market

Such companies connect buyers and sellers online to achieve high efficiency that is hard to achieve in the real world. The leading online market is eBay. The market attracts as many people as possible to sell their own goods, and only charges symbolic fees for goods shelving, because the more goods there are, the more buyers the platform will attract, this increases the possibility of a transaction and brings more commission income to the company. Due to the network effect in the market, it takes a long time for these companies to reach critical quality. However, once this is done, they often make long-term profits. Some newer markets, such as companies like AirBnB that focus on high-price goods (more than $100), may expand faster than traditional markets. According to my analysis, a typical market requires 2 million types of commodities to be launched, and the total monthly sales volume reaches 12.5 million US dollars to achieve annual revenue of 10 million US dollars.

Key indicators:

* Listings)

* Listing Fee)

* Sales)

* Commission (Commission)

Type 6: Video

Although the cost of video production has declined all the way, it still requires a moderate investment and high-level technology to produce high-quality video content. The video industry has seen the emergence of freelance video producers who make and edit specialized videos on various themes and charge between $200 and $300 every 5 minutes. As a video company, once you can master the production of videos, you need to reach as many audiences as possible. In online media, the video advertising rate is the highest grade (CPM is between 15 and 20 USD), but the audience can only watch one advertisement at a time, so the number of ads displayed is crucial. The more viewers you have, the more important you are for online media buyers. Most media buyers do not even consider your video unless you can ensure that their ads can reach tens of millions of viewers. Assuming that CPM is USD 8, Internet video companies need 0.12 billion million video views per month to achieve annual revenue of USD 10 million.

Key indicators:

* Independent audience (Unique Viewers)

* Ad Impressions)

* Sales Rate (Sellthrough Rate, that is, the inventory Rate that has been sold)

* Cost per thousand marks (CPM)

Type 7: Business

Online sales of physical objects is a mature business model. With the rise of Google over the past decade, e-retailers have become increasingly intelligent in increasing traffic through free SEO (Search Engine Optimization) web pages and paid keywords. Social media now collects traffic through Facebook and Twitter. For example, Groupon receives 50% of the traffic from Facebook and Twitter. Companies like Threadless and ModCloth use another innovative way to increase customer loyalty and repurchase rates by providing a unique community experience while maintaining low marketing costs.

Once you let potential consumers see the product, you need to try your best to make them buy the product. Because of the existence of free and low-cost sales channels, it is very simple to launch e-commerce businesses, but because of the complexity of business development, customer service and warehouse management, therefore, it may take several years for these companies to make profits.

Key indicators:

* Independent access volume (Uniques)

* Conversion Rate)

* Average consumption (Average Spend)

* Gross Margin (Gross Margin)

* Purchase Cost (Acquisition Cost)

Type 8: Lease

Leasing Companies like Chegg, Zipcar, and therunway offer users digital or physical goods, similar to commercial companies. The biggest difference is that these companies do not sell ownership, but only short-term use right. Therefore, the inventory turnover frequency, average rental rate, and rental frequency are the main indicators of such businesses. The key issue is how many times a single asset needs to be turned over to reach the Balance Point.

Key indicators:

* Independent access volume (Uniques)

* Conversion Rate)

* Average Rental Rate (Average Rental al Rate)

* Repeat Purchases)

* Customer Acquisition Cost)

Type 9: subscription

Subscription companies are charged on a monthly, quarterly, or yearly basis. They can provide content (music and video), Information (finance, News), and use services (LinkedIn) or data services (Box.net ). No matter what kind of paid service you provide, the most important indicator is LTV (customer lifetime value, customer lifetime value ). LTV not only covers the customer turnover rate (the proportion of each month's customer base stops paying), but also shows how much money you have for customer purchases. Once subscription businesses enter maturity, their profitability and stability are amazing (such as Netflix) because they know how to actively and efficiently obtain a new customer. To make profits for such companies, the cost of marketing should not exceed 40% of LTV. Like in the market, subscription companies often need several years to expand, but if they have 50 thousand subscribers, their long-term prospects will be very good.

* Independent access volume (Uniques)

* Conversion Rate)

* Customer purchase (Customer Acquisition)

* Customer Churn Rate)

* Customer's Life Time Value)

Type 10: Music

It is difficult for start-ups that consume audio/radio stations to make profits, because the rate of audio ads is the lowest. This is because audio ads are not easy to buy, and display ads are often ignored (browser tabs running music apps are often invisible ). Another difficulty is that audio companies cannot easily obtain cost-effective content: It is often difficult to obtain song copyrights, and the cost is too high. The example of a music website Pandora shows that creating a sustainable music business is also possible, but it requires a large scale (more than 10 million users) to reach the critical point. If you can attract 10 million independent audience each month and show each person an average of 40 ads at a rate of $2 per thousand times, in addition, you can convert 1% of free users into some form of paid users, and then squeeze an additional 2.5 USD from these users, then you can achieve an annual revenue of $10 million.

Key indicators:

* Independent access volume (Uniques)

* Ad Impressions)

* Cost per thousand marks (CPM)

* Conversion Rate)

* Upsell Value)

Type 11: sales expansion

Sales expansion companies need to do four very difficult jobs: 1) attract huge traffic; 2) Let people click on product advertisements; 3) Get a high conversion rate; and 4) provide products with high value, so that the company can obtain enough revenue. A successful sales expansion company or professional products such as financial services, or can attract regular customers. However, financial service companies are also facing challenges, because customers will not easily change their credit card companies, and few new investment accounts will be opened in a year.

Key indicators:

* Unique visitor)

* Product advertisement (Offers Viewed)

* Conversion Rate)

* Affiliate Cost Per Action)

Type 12: hardware

Perhaps the hardware company's business model is the most traditional one: They make physical products and sell products through online and offline channels. The retail price minus the sales cost of goods, and the marketing cost is the profit of the hardware company. Many hardware companies now bind hardware and services together. I believe that in the next few years, hardware companies will grow significantly because: 1) China's manufacturing costs will continue to fall to meet personalized small batch production; 2) remote Software updates are easier; 3) unique services can be bundled on devices. In short, this is a field worth attention.

Key indicators:

* Sales volume (Units Sold)

* Gross Margin (Gross Margin)

* Marketing)

Type 13: Payment

Payment service companies charge a small fee for each transaction through the system. Therefore, the most important indicator of such companies is the number of customers who use the service and the average amount of transactions. Assume that the transaction rate you charge is 3.5%, you need to have 1 million customers each month, and each customer pays an average of 25 US dollars to achieve annual revenue of 10 million US dollars.

Key indicators:

* Number of independent Users (Unique Users)

* Average Payment (Average Payment)

* Transaction Fee)