Hey folks, I'm almost ready to launch a really cool (and really useful obviously) new applet, but in the mean time, I've been doing some thinking this morning about Online Business models, and I figured my notes would make a half decent post, so apologies in advance if this rambles a bit .....

The State of Online - 2010

Looking back, Web 2.0 was a weird period. When we went through "Dot Com" in the 90's, the overriding feeling was "Wow I can make millions on the net!!!!" but because so many were hurt when the bubble burst, I think everyone went through Web 2.0 thinking "Hang on a minute, all seems great but where's the business model?" - in other words, folks wised up a bit, but then we were told we needed to generate free content, or have users generate it...

It's amazing that services the slew of "Web 2.0" products that are provided completely free with no premium offer, advertising revenue or email list can, but here we are.

Fundamentally, I don't think the "old" models of online business have changed much, nor have much significant threat on the future. Currently, I think Mobile is an additional opportunity, not a "replacement" for good old fashioned desktop web browsing. If anything, the iPad proves our Full screen Web Browsing habits need compromise with the small screen.

Video and automated Sharing were the two greatest thinks to come out of the last decade. Online Video changes everything now it's pretty much ubiquitous, and automated sharing (i.e Facebook, Twitter) is just a great benefit for website owners that didn't exist in the 90's.

So what's the best type of Website business to Start?

When a lot of things are changing (Mobile, Video, Cloud, Twitter, etc) it's easy to fall prey to advice that jumping on these bandwagons as the motivation for creating an online business is a reason to exist. In reality (as I am finding) cold hard facts apply:

Business is the exchange of money for something of perceived higher value

Which means if your new iPhone game isn't better than Angry Birds, you're in trouble.

Product

eBook. Video Course. Coaching. Mail Offer. Software Product (that's me) - these are all straight down the line, pay-for-acquisition Product Offers. This model has not, and will not ever change significantly. As long as we believe the purchase of a product outweighs the cost of not having it, products in all their forms, will sell.

Product means overhead (time and materials) and risk in creating that product ahead of marketing it, though this can be mitigated by low/zero cost market research costs via methods as simple as Google Keywords.

Product also means continual enhancement to satisfy existing and reach new customers, and development of new products for cross selling to your existing customer base (that's more T&M).

Service

Web Design, Hosting, SEO, Outsourcing in all it's forms. Service is all about "do something for me so I don't have to." A great business to be in if you have a reputation that your service works, especially if that service is automated (e.g. Web Hosting), not to easy if that service relies on Human labour. Web Design for instance, will vary wildly in price based on the reputation, quality and ability of the provider, whereas Web Hosting does not have large pricing ranges (assuming you compare the same hosting features) because it's 

Publisher

Ad-supported Blogs, Email Newsletters, News sites. A risky model that only works well for the few who can get a big enough audience to command high advertising revenues or fall back on what AdSense will provide them. This is entirely dependent on building an audience first, and continual publication of relevant content that will retain a readership. Continual publication of that content is why  99% of blogs don't have any content beyond the first 2 or 3 posts, and why the media industry is in so much trouble....

Intermediary

Affiliate Marketing, Websites with Product Reviews etc. In this form you have no product and no service. Your business is to connect buyers with sellers, as an affiliate marketer that means finding eyeballs waiting to buy, and working hard to differentiate & compete with the many other affiliates doing exactly the same thing.

Affiliate marketing seems easy to many, but it's far, far easier when run off the back off the Publisher model above where the trust and engagement of an audience with the publisher (blogger) will result in greater conversions than "overnight" affiliates attempting to make sales off PPC etcetera

Marketplace / Directory

eBay & Craig's list hold the title on this, followed by all the countless classified and niche marketplaces around the web. Similar to Affiliate Marketing in that it's about connecting buyers with sellers, which means you've got that chicken and egg problem of which comes first - the buyers or the sellers? Digital Marketplace experts Envato kicked off their enterprise a few years back by simply giving away thousands worth of "buyer dollars" (or was it free listings? can't remember) to seed their marketplaces with enough content to make them viable.

My friend Bruno runs a few marketplaces and does a similar thing when he launches a market - he simply offers sellers  free listings to kick start the marketplace.

The great thing about this model is it's completely automated - no physical inventory, no product development/maintenance, and no ongoing provision of service. However, because of this low barrier to entry, this model survives on the ability to maintain traffic numbers in both sellers and buyers and stay competitive.

Business Directories like Yellow Pages are the same deal. The big guys like the Yellow Pages may be shitting themselves that Google Maps are making their entire business model free, but don't be fooled - niche directories that can dominate keywords can still make dollars if they can prove they have qualified eyeballs.

Others

There are others I'm sure you know of, but these seem to be the main ones to me, which leads me on to ...

The Holy Grail - What is the Ultimate Online Business Model?

Taking all the above into consideration, I think a blueprint for the perfect business model has these attributes:

1. Business Model

Dollars for Database Rows
The "Dollars for Database" formula of Marketplaces is powerful - based on decent enough website technology it's possible to run a  business with complete automation

Can Scale, and scales vertically
This is a no brainer, but the model needs to be scalable. I nag my friend about this for his site. His site services an ultra targetted niche (he'd rather I didn't say - think "accessories") which could be easily scaled vertically to service different "accessories" within the same niche. Put another way, it's like when a popular book come out (e.g. Rich Dad, Poor Dad) and then suddenly there's 12 variants on the shelves to appeal to different audiences (e.g. Rich Dad, Poor Mum?).

Simple Offer, Understandable Value
A mistake I've made right here with Really Useful Web Apps is some of the premium products are "complex" offers - they contain loads of features that help you achieve results quickly, but don't neatly summarise into a simple offer. Your classic, "Internet Marketing" long form sales letter has the same problem - any offer that takes 40 paragraphs to explain will be outsold by a simple, brutal offer.

So what's a simple offer? Examples you'd probably buy today -

• "We guarantee your website will be featured on 30 PR4+ news websites for $300 or your money back"
• "Sponsor your own email to our list of over 2000 qualified buyers of Marketing Professionals for $500" 

No sales letter necessary - just brutally simple offers

Standard Price Point, Premium Price Point

Whatever the offer, I believe their should be a minimum of two price points - the "try first" price, and the "committed" price point. The whole science of pricing warrants a post by itself, but two price points caters for two audiences - buyers that you've out priced and buyers with cash to lose. Offer of course, comes before price. If the offer's really good (see above, easy said than done), multiple price points matter less.

2. Competitiveness

The "Dollar for Database" model doesn't bode well for competitiveness, but by creating a scaleable model this can be alleviated by narrowing the focus to niches, thus (hate to say it) using a Long Tail effect. The Yellow Pages / Google problem is the opposite of this, suppose Yellow Pages launched a site just dedicated to Chinese restaurants, or even better, Chinese Restaurants in New Jersey. Blow $8 on a domain name and they'd own Google Searches for that forever (well maybe not Google given this particular case but certainly Yanoo and Bing)

Ideally the business in question has less than 500,000 results per search term in Google for key terms, and at least two advertisers (i.e. it's worth spending money to be there) with a CPC preferably under $2

3. Operation

No Content Creation, No Product Creation
Product creation is time consuming and risky, and I write on this blog because I want to, but I don't believe the "Publisher" model is a particularly great one to be in. The overhead in either creating content or managing other people doing it is unappealing to me as a business model.

So here's the problem - create a business that doesn't rely on creation of content, but still attracts and retains users? User generated content? - Easier said than done. If Dot Com left behind a million websites with no business model, Web 2.0 left behind even more with a "User Generated Content" system with no .. content (I should know, I made one).

But I only go to websites with interesting content, or websites that do something for me. Aggregate content? - I don't think so. Google Reader is probably the greatest content aggregation website on the planet, but they're unlikely to engage me in selling a marketing product versus Seth Godin's blog.

What about if you could leverage businesses to create content based on information of relevance to their audience? 

Facebook & Twitter are the primary winners in this - Facebook Pages especially have seen hundreds of businesses flock to maintain outposts on Facebook to get some of their "Like" love (me included) and what are they selling? - that's right - advertise your page. Twitter are catching up, but users benefit - Business Generated Content.

Business Generated Content
BGC is going to be more relevant, more professional and more valuable than any User Generated Content will ever be - Businesses aren't going to create spam, they're going to carefully create their content to ensure it's appealing enough to engage / retain an audience, and it's going to be worth more to users than sifting through meaningless Tweets, YouTube videos etcetera. In reality, the best Twitter accounts (celebrities aside) are examples of BGC  - individuals or companies using Twitter to provide links to valuable stuff to attract an audience.

So if getting Users to generate content is difficult, how on earth do you get businesses to? There's only one way in my mind - and that's to combine content businesses generate with the core offer that forms part of the business model. In other words, the content a business creates through this model is content they are actually paying to publish.

And why would they do that? Because they believe it will provide them with more customers, which means the model is that a website has enough targetted visitors to warrant charging related business for creating content for you. But we're back to that chicken and egg problem ....

Automated List
Before I move on, let's mention lists - "The money is in the list" - I've heard it so many times it rings in my ears, but just like that Blog / news website, it's an overhead in content creation, unless that BGC I talked about above IS the list. Don't get me wrong, a personal list from a human being is going to far outweigh an automated generated email, but if that content is valuable, it will hold enough subscribers.

4. Technology & Delivering it

Simple To Build
Many "ideas" (products) take too long to create and test. The most important thing is being able to deliver an idea quickly. If it's a simple offer (above), focusing on just delivering the technology for that and no bells and whistles (erk. guilty again) should mean a market can be entered quickly. Once the idea is proven to work, enhancements can be made - where I mention "automated lists" etcetera above, these don't need to be there from day 1.

As I am discovering, speed in delivering less than guaranteed ideas is incredibly important ...

Simple To Sell Up
If the idea scales vertically, the technology should be able to be re-configured per niche it scales to, which means if a niche doesn't work out, it's easy to sell. What makes a few dollars in revenue but has an audience may be worth something to someone willing to buy on Flippa which means the investment's not dead if it doesn't work out.

5. Marketing, Gaining Traffic & Users

Resolving Chicken or Egg
Simple order of events - (1) Value on website (2) Visitors (3) Buyers. There's no other route. Start with something small but valuable (see below), get visitors you can provably keep, then work on buyers.

Seed it with a freebie
To begin, the one piece of content that's worth creating (or paying someone else to create) is a decent, valuable "freebie" that will be of value to the target audience. This should then be used as a viral bribe to encourage users to either (a) Email a friend about it to get it or (b) Tweet / Share it to get it. An additional viral bribe should be created to get list sign ups in the first place.

Seed it with $$$
Once it's ready and those freebies are built, PAY for traffic in the cheapest places you can get it. That means low cost keywords, and preferably using your $$$ to pay for other people (eLance, TaskUs) to do stuff for you.

Use Search Architect to discover places you can list your site and get those all important keyword links necessary to maintain traffic levels

Promotion Auto Pilot
Once there's enough traffic, you're in a position to let users promote for you perpetually. The idea here is simple - get the businesses using your system to provide special offers through your site, then get users to take a sharing action to take advantage of the offer - tell friends for a group price, tweet for a discount, any action that will spread the message and can be automated without human involvement. 

Have you got a fit?

So that's my thoughts. It's probably a tall order, but it contains the basic ingredients for a practical business. My challenge to you is, what's the closest fit that you know of that meets some of the criteria above? Answer below ...