A Terrific Overview of 'Free' Business Models for Online

by: Chris Anderson

From Box UK, a survey of business models used by the top Web apps, most of them variations of ad-supported Free and Freemium. In the chart below, the largest segment (ITA) is ad-supported, the second largest (ISV) is Freemium. After that is referral (ITR) and then the sale of virtual goods (IPV), such as the gifts in Facebook.

We spent a few hours going through the Webware 100 Top Web Apps for 2008, analysing the business model(s) used by each. The chart below shows the results of this survey: 34% use Advertising, 12% a Variable Subscription model, and 8% each for Virtual Products (typically digital downloads), Related Products (typically a large software company offering a free product to attract you to their platform) and Pay-Per-Use.

Chart showing results of business model survey for top 100 web apps of 2008

Business Models

Model Variation Notes
I Immediate Revenue Models for generating regular income, cash-flow (‘Self-Sufficient’ models)
I.S Subscription Charge the end-user a regular, recurring fee. Consider:
  • Minimum contract lengths
  • Buy X (days/months/weeks) get Y (d/m/w) free
  • First X (d/m/w) free (‘Trial period’)
  • Discount periods
  • Pay to remove adverts
  • Pay for additional (‘premium’) content
  • Pay for API/advanced features
  • Pay for support subscription
I.S.F Fixed A single, fixed subscription cost (e.g. to access an online magazine or a specific service).
I.S.V Variable A number of fixed-price subscriptions are available to the end-user; fee dictates feature/usage limitations, etc. This includes the ‘Freemium’ model; a (usually limited) ‘free’ option alongside one or more paid options.
I.T Third-Party Supported The end-user receives the service for free; a third-party pays the fee for a returned service.
I.T.A Advertising One or more third-parties place clearly defined adverts within the website/application. Variations of adverts include graphical banners, text, inline, pop-over, interstitial, etc. Normally charged by cost per click, cost per action, or cost per thousand impressions.
I.T.S Sponsorship One or more third parties become the ‘official’ sponsor(s) of the website. This could include fixed (non-rotating, typically prominent) adverts, integration of third-party branding (colours, slogans) and/or licensing agreements.
I.T.C Paid Content Advertorials: third-parties pay to include marketing-led content on the website.
I.T.P Paid Placement Third-parties pay to be included in lists or in the application (e.g. comparisons, reviews, entertainment listings).
I.T.R Referrer End-users are directed to third-party sites, which pay a fee to the website owner for any referred transactions (e.g. comparison sites).
I.T.L License Content Third-Parties are given access to re-use the content from the web-site for their own purposes.
I.P Payments The end-user makes individual, ad-hoc transactional purchases.
I.P.U Pay-per-use Micropayments: the end-user is charged a fee to use an online service (one-off, or for a limited time). This includes the 'brokerage' model, where user(s) are charged a fixed-price or percentage per transaction (e.g. ebay). This also includes the purchase of ‘credits’ e.g. 10 uses of the service for a fixed cost. Discounts can be offered for bulk purchases.
I.P.P Physical Products The typical e-commerce model; includes books, CDs, holidays, tickets, etc. Typically each ‘physical product’ has a non-arbitrary cost associated with its production.
I.P.V Virtual Products The end-user purchases a ‘digital’ product that typically has a negligible cost of replication. This includes virtual gifts (e.g. Facebook), in-game items (e.g. World of Warcraft), and other virtual assets (e.g. land in Second Life).
I.P.R Related Products The end-user has free access to the main product/service. An additional, optional charge is made for related ‘added value’ products/services, e.g. documentation, support, commercial versions, related iPhone or Android application, etc.
I.P.D Donations The website relies on voluntary end-user donations (e.g. a ‘Tip Jar’).
L Long-Term Revenue Strategic, ‘Invest and Reward’ models where costs are incurred initially for a longer-term ‘pay off’.
L.E Establish and Exploit Attract a substantial audience before monetizing.
L.E.R Re-use/Re-sell Re-sell/re-use the data/content, usually from User Generated Content websites e.g. create books, posters or other purchasable products from data/content created on site.
L.E.P Platform Establish a platform, then charge for third parties to participate once an audience has been established e.g. iPhone. See also Facebook.
L.E.B Branding Build a ‘personal brand’ for yourself/your company. Once awareness is raised, go on Conference/Workshop/‘Expert’ circuit, or release a book, etc.
L.S Sell/Exit Create a popular application/website, then make it someone else’s problem to monetize e.g. YouTube

Meta-Models

The following business models can be applied in addition to most of the basic revenue models described above.

Model Variation Notes
M.R Revenue Share End-users are offered a cash incentive to make the website/application generate revenue, by sharing a percentage of revenue with them (usually based on their personal referrals or popularity of their content).
M.R Re-Seller The end-user can re-sell the online service.
M.R.A Affiliate The end-user is paid to direct customers to the website, typically by listing/selling the products/services elsewhere.
M.R.W White Label The end-user can brand/tailor the online service and re-sell it as their own (typically taking a percentage of the generated revenue, or paying a fixed subscription cost to the original service).