The Monetization Challenge for Internet Based Companies

February 18th, 2010

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One of the most complex problems that Internet based companies face is how to sustainably generate profits.

Having a huge user base has proved not to be a guarantee of becoming profitable. Some of the great players in the market have had trouble doing so, even when they have strategic relationships with marketing agencies, vast amounts of cash to advertise their products and experienced business developers. The cases are well known, You Tube, Facebook, Twitter. The increasing pressure from stockholders to bring in cash has pushed their business developers along with the engineering teams to look for more creative ways to translate usage into money. When it comes to generating revenues there are currently two ways to go:

1.- Paid-for services – These types of products usually have a competitive advantage and also offer a considerable value to the user. Many times they are “premium” versions of free products. They normally offer functionalities or access to data that is not open to the regular user base. Some examples are online dating services, online games, job posting and business networking sites.

2.- Services where the service is not directly paid by the user – These products are generally oriented into giving users a service that represents a considerable utility and/or experience in exchange for the opportunity to use the data they generate. In most cases this translates into targeted advertising. The players that focus on this strategy are constantly looking to increase their user base. The more users they have, the bigger their leverage at the table with advertising agencies and customers in general. Some examples are search engines, email and social networks.

It’s a common trend for online companies to make different combinations of both monetization methodologies. Some good examples of companies* that have been successful doing so are:

A) DeNA – Social network based in Japan that generated more than 190 million USD in revenues and over 40 million USD in profits for 2008. Their income comes mainly from games that their users buy, digital gifts, and e-commerce tools.

B) Xing – A social network based in Germany founded in 2003. They generated about 50 million USD in revenues and over 10 million USD in profits for 2008. Their income comes primarily (>70%) from a premium version where users have tools that make business networking along the system easier. They also bring in revenue from targeted advertising and job posting forums where the companies pay to recruit.

C) Google – The search/email/online advertising giant has changed the market by a heavy usage of data mining and switching from regular advertising to bidding procedures.

*Their numbers come from their financial statements since they are public companies.

The issues with the current monetization strategies

To add more difficulty to the already hard problem of successful monetization, there has been recent controversy with regards to the way user generated data has been managed by internet based corporations. Basically their procedures and limitations have not been transparent. Users feel uncomfortable about that, and in response some relevant individuals have responded that privacy is over. Although there have been recent efforts from the internet advertising tycoons to prevent governments from stepping into the debate, the fact is that the current system is not sustainable.

Potential ways to solve the problem

In order to keep offering free products and monetize at the same time, companies would have to find a way to gather data, mine it and keep it in a way that’s not accessible for anything else that is not the user’s own experience or the analytics procedures. Some developers have insisted that doing this is impossible since there is no way to store information and analyze it in a way that the particular behaviors are kept completely private.

(image source)

Tagged with: monetization strategies, privacy

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