Starting an E-Business on a Shoestring
Step 2: Devise an Adequate Revenue Plan

Of the millions of commercial websites online, only a small percentage have an adequate revenue plan. Most aren't making much money at all. Some are hemorrhaging cash like it was going out of style. But don't fall into the trap of thinking that no one is making money on the Internet. That's just not true. Tens of thousands of commercial sites are profitable, and probably hundreds of thousands are making money with the prospect of making more. As the online customer base is building in Europe, Latin America, Asia, and Africa, many more will be able to make money. The key is a clear-sighted revenue plan.

Shoestring businesses can't usually afford the luxury of spending other people's money, so small businesses are forced to earn money rather rapidly or not at all.

Traditional vs. E-Businesses

Before we consider revenue strategies, however, I want to acknowledge that many commercial websites aren't designed to generate revenue themselves, but to increase sales through other channels -- and that's an entirely legitimate business plan. An auto dealer, for example, might not transact a car sale over the Internet, but the information on his site is designed to bring educated customers into his car lot ready to deal. Your site might represent your brick-and-mortar business on the Web in order to let customers know you're there and what you offer.

For several years my site and newsletters were designed to promote my e-commerce site design business. I didn't accept any credit cards at all, but enjoyed a successful and growing business communicating with clients by e-mail, fax, phone, and FedEx. Was that an e-business? Sort of, in that all my advertising and lead generation was done online. But it also had strong similarities to a traditional service business.

In this article, however, I'll be examining e-businesses, which I'll arbitrarily define as businesses designed to generate all or part of their income on the Internet, that is, through services performed or products paid for over the Internet. I agree that this definition is perhaps too narrow, but bear with me for the sake of this discussion. These e-businesses look to three primary sources of revenue:

• Advertising Revenue, where advertisers are paying for exposure on your site or in your e-zine.
• Referral Revenue, affiliate programs, pay for leads generated, or other types of payment made for performance of one kind or another.
• Sales Revenue, income from products or services performed or sold via the Internet.

I'm sure there are some revenue types that don't quite fall under the Big Three, but let's look at each and see their upsides and downsides as sources of revenue for your business.

Advertising Revenue

Advertising revenue looks pretty good at first glance. You put banner ads on your webpages and advertisers pay for the privilege. What could be sweeter? Unfortunately, few commercial websites will be able to earn much money from advertising, especially banner advertising. Here's why. Advertising revenue is realistic mainly on sites that are both:

• Destination sites that receive a huge amount of website traffic, and
• Sites narrowly targeted towards customers whom advertisers are willing to pay big bucks to reach.

To see why I say this, let's look at what's happening in Internet advertising. While the average "Rate Card Price" for banner ads has remained steady around $35 CPM (cost per thousand page views), the actual average price at which advertising is selling is substantially lower. You can purchase advertising on numerous ad networks for $5 to $20 CPM for "semi-targeted" ads. That means these ad networks are paying participating websites about $1 to $10 CPM. Let's see how this works out.

This revenue projection assumes (1) that you sell out your advertising completely each month, and (2) that your costs to sell the advertising allow you to earn a profit. With tens of thousands of websites there is often unsold inventory available, especially on untargeted sites. To sell advertising you'll need to develop (1) your own in-house sales force, (2) outsource sales to a representative who'll expect 20% to 50% of the gross ad sales, or (3) sell your inventory to an ad network.

Don't confuse ad agencies like Beyond Interactive http://gobeyond.com/ and their staff of media buyers, with ad rep agencies such as Cybereps.com. http://www.cybereps.com Media buyers work on behalf of advertisers, while ad rep agencies work on behalf of website owners. Ad rep agencies generally don't deal with companies that have fewer than a million or so page views per month, unless these sites are highly targeted.

Let me explain what I mean by targeting. In the chart below you'll see how CPM rates can get very high for a few select categories of websites. Most, however, fall into the category of untargeted or semi-targeted.

While advertising used to be a premier revenue source, several trends make it more iffy:

1. Advertising dollars are being spent more carefully since the dot-com meltdown on the NASDAQ in April 2000.
2. Sites that carry advertising are getting much more aggressive about selling ads.
3. The increase in sites means that inventory (total advertising space available) exceeds paid advertising, and actual sales prices are in decline.
4. Media buyers find it easier to deal with a few large ad networks than dozens of smaller sites.

While advertising can be a substantial revenue source for some sites, you're safer to plan other streams of revenue to supplement it.

Referral Revenue

Referral revenue describes income you receive from referring visitors at your site to another site where they make a purchase, sign up, or take some other kind of action. Sometimes this is called CPA (Cost per Action) or CPC (Cost per Click) advertising. There is a fuzzy line between referral income and advertising. In both cases you are helping to promote another business; you're just getting recompensed in different ways.

One of the most popular types of referral programs are Affiliate or Associate Programs. Typically, the siteowner (affiliate) signs an agreement with a merchant, or an third party affiliate service bureau, such as Commission Junction, that if someone makes a purchase as a result of clicking on a link at the affiliate site, the affiliate will receive a sales commission of 3% to 15%, and sometimes more.

It sounds like a pretty easy way to make money. No work, just ad a link or a banner and wait for the dollars to roll in. I've belonged to dozens of affiliate programs over the past three years, and have learned this:

1. Affiliate programs must directly relate to the content of your site, preferably integrating the affiliate link into the text of articles and information. Without this close relationship between content and product, your profits are negligible.
2. High traffic sites with a targeted audiences are required to realize much income.

Alongside affiliate programs I categorize business-systems such as http://www.vStore.com and http://www.Quixtar.com .  They automate the ordering process, but margins are often not enough to allow advertising that will bring significant traffic to the entry page and profit at the end of the month.

The right side of each page of my website is devoted to Web marketing and e-commerce books, many of which I have reviewed. Each is linked to the appropriate product page at Amazon.com. If someone makes a purchase of a book I am directly linked to, I make 15% of the purchase price. If they browse around and find another book, I make 5% of the purchase price. Last quarter, for example, here was the report:

  Total shipped to customer this quarter: $14,804.50
  Total New Customers: 102
  Referral fee this quarter:              $ 1,178.50
  Credit referral fee previous quarter:   $     0.00
  New Customer Bonus:                     $   350.00
  Total Earnings:                         $ 1,528.50

  Purchased books from my direct links:
  Total shipped: $4,385.87
  Referral fee (at 15%):                     $657.33
  Browsed and found books:
  Total shipped: $9,877.22
  Referral fee (at 5%):                      $494.10
  Other Qualifying Products:
  Total shipped: $541.41
  Referral fee (at 5%):                      $ 27.07

I share this to point out how much a site with 400,000 to 450,000 page views a month can make on an affiliate program directly related to the content of my site. I also had good success with Ken Evoy's Make Your Site Sell, http://sales.sitesell.com/myss/ and WebPosition Gold software, http://webposition.com/d2.pl?r=AQH-55E7 and, to a lesser degree, Cory Rudl's Insider Secrets course. http://www.marketingtips.com/t.cgi/15267/

Now I value the income I receive from affiliate programs, but by themselves, they don't make what I consider a "good living." Now if I had millions of page views, I am sure I'd do better, but probably the products wouldn't as closely relate to the site content.

I've reached the conclusion that, for most sites at least, affiliate programs are a good ADDITIONAL source of income, but not a main source of revenue.

Sales Revenue

This leaves us with sales revenue for goods or services that you sell or re-sell directly.

Services. I believe that a great deal of revenue will be generated through services sold via the Internet. The services may be performed offline or online, but the ordering and paying for those services will be online. This includes everything from newsletter subscriptions, access to password-protected information, opt-in e-mailing services, tax preparation, database warehousing, and thousands of other services.

The more automated the service, the more "productized" it becomes, and you move from selling time to selling a product. The more person-time invested in performing the service, the closer it is to a regular "job." Now don't get me wrong, even though you are selling a time-intensive service over the Internet, you can certainly gather more business through marketing it nationally and internationally.

Products. Hard and soft goods can be bought and sold via the Internet in online stores as well as in eBay, B2B marketplaces, and e-procurement systems in an increasing number of fields. For more than two decades the US has had a thriving mail-order industry. In a sense, an online store is just an automated catalog. But while the Internet automates the front-end ordering process, the make-or-break decisions of the business often rely on the efficiency and costs of back-end product fulfillment and customer service. Drop-shipping is a way of outsourcing inventory, warehousing, and product fulfillment, but it cuts margins and makes it more difficult to offer excellent customer service.

Selling products and services means that you must deal with real customers, some of whom will phone or e-mail you angrily and demand that their concerns be heard. None of this is easy. But I believe that for many siteowners, selling or re-selling goods and services is the primary way to make the Internet positively affect the bottom line.

Multiple sources of revenue

Even better than just one of these approaches is to find ways to incorporate two or even all three sources of revenue in creative and innovative ways. The site that can include advertising revenue, referral revenue, and sales revenue is best positioned to leverage their Internet investments in a way that will produce profits. When you're starting an e-business on a shoestring, make sure that you've designed a realistic plan to bring in the revenue you'll need to continue.