If you’re in the process of planning or starting a business online, you might be wondering what the best way to make money is.
This is especially true if you’re planning to start a lifestyle business (a flexible small business with the goal of supporting the owner’s lifestyle as opposed to a typical business with the goal of earning as much as possible).
Revenue model is a fancy business term that just means “how a business makes money.” When it comes to online business revenue models, there are lots of different choices. If you’re planning a new business, you should understand the differences between potential revenue models and make sure the way you’re planning to make money will be a good fit for your business and life goals.
For example, some revenue models will require a big investment of time or money before you start to earn an income. Some might allow you to keep your day job while starting the business. Others might be better suited to running while traveling.
Revenue models can also be adapted and mixed to meet your needs. Let’s take a look at several of the major models for making money online so you can decide for yourself which would best support your lifestyle.
The four most popular online business revenue models
The four most common revenue models for online businesses are: selling services, selling products, affiliate marketing and advertising.
We’ll go into depth about the features of each below, but first let’s compare them to one-another according to four standard criteria that every online entrepreneur should consider:
- Start-up time: how long will it take you to build up to a full income?
- Income “passivity”: how “hands off” could the income eventually be?
- Revenue per visitor: how much average revenue will you earn from each visitor to your site?
- Visitors per month: how many visitors per month will you need to earn your target income?
In the graphic below, I’ve plotted each of the four popular revenue models along a line that represents earning a “decent living,” whatever that definition might be for you. For example, looking at “selling services,” you’ll see that revenue model has the highest average revenue per visitor, lowest required visitors per month to earn a “decent living,” it has a short start-up time and a low likelihood of generating passive income. The others are also plotted accordingly:
These are what I consider the typical expectations of each revenue model according to the four standard criteria we laid out. There are of course exceptions to what you can expect from each revenue model, and sometimes exceptions can be used to your advantage. If you know of any ways to majorly shift one of the four revenue models within the four criteria above, please share in the comments.
Let’s take a deeper look at each.
Selling services may be the most common revenue model online. Other names for it include freelancing, consulting or independent contracting. Some services that people commonly sell online include graphic/web design, copywriting, editing, software development and marketing.
As I mentioned before, one of the primary features of selling services online is high revenue per visitor/customer. Most freelancers deal with only a handful of customers per month and still earn a decent wage. This means you don’t need to attract as many visitors to your website (all else being equal) to earn your target income as you might with the other revenue models.
Selling services is one of the fastest ways to get started earning a living online, especially if you already have skills you’ve earned from working in a traditional job. You can create a website advertising your services, get the word out and start working with clients in a short time. Other revenue models might take months or years to earn a full living.
On the other hand, selling services day-in and day-out for years can become a tiring treadmill that’s hard to get off of. If you become accustomed to earning a living by trading your time, you might find yourself not taking very much time off and feeling chained to your business.
Selling services is a very difficult way to earn passive income (you would have to run a team of freelancers to do so, and even that is hardly passive). Many people who start by selling services end up looking at ways to create products or otherwise earn a living without trading time.
Selling products refers both to selling products you created directly online, as well as selling other people’s products (that you warehouse or via drop-ship) through your website.
When you sell products (unless you’re selling high-end luxury items), you will earn less revenue per customer on average than you do when you sell services. You will also have more costs to pay for each dollar of revenue you earn. This means you’ll need to attract more visitors to your website to earn your target income.
Startup time for a products-based business are usually longer than for a services-based business. You will have some product development or procurement time, as well as more time to set up your website and attract your audience. Paid advertising (when it has a positive ROI) can help bring visitors in faster than relying on SEO or organic growth.
There are many services like Etsy or Shopify that help you create an online store to sell your products through. They take out much of the startup time that would normally be involved in setting up your own site. They also help you market your products to some degree, and can bring more legitimacy to your online store.
A benefit of selling products over selling services is that a products business can more easily be turned into a passive-income business. This is especially true if you’re selling products that someone else creates. Beware that when you warehouse products yourself, you are creating the need to be physically in one location to run your business, or to have employees handle that part of the business.
Affiliate marketing is a revenue model where you are paid a commission whenever a customer you refer to another site purchases something from that site. Affiliate marketing is a $13 billion dollar industry and is quickly becoming popular among entrepreneurs who want to build a lifestyle-friendly business.
With affiliate marketing, you will earn less revenue per visitor than you would when selling a product or service directly yourself. Typically as an affiliate, you will be paid a commission of between 5% and 75% of each purchase you refer (depending on the type of product).
To earn a “decent living” as an affiliate marketer, you will need to attract more traffic than you would when selling products or services directly. Many affiliate marketers also build more than one site (some build hundreds of small sites) in order to reach enough people and earn a full income. You can start earning some income very quickly with affiliate marketing, but you should expect it to take many months to earn your target income from affiliate marketing.
The most attractive feature of affiliate marketing to lifestyle entrepreneurs is that affiliate marketing can become a very passive income source. Once you’ve built up your income from affiliate marketing, you can generally work where, when and how much you choose because the work required to maintain your sites is very flexible.
Advertising tends to bring in some of the lowest revenue per visitor of any online revenue models. The amount you can earn per impression is largely dependent on your niche and the overall traffic to your site. Because of this, you will need some pretty impressive traffic numbers to earn a decent living from advertising.
However, it is possible for a solo entrepreneur to earn a living through advertising, and an entire mini industry has grown up around Google Adsense advertising. To make it work, you will either need to be great at SEO, or great at driving massive traffic through some other means.
The passive income potential of advertising as a revenue model really depends on how you create your content and attract visitors. Because you’re not dealing with selling products or services, advertising has the potential to be a highly passive income source, although the management of a single site that attracts enough traffic to make advertising viable can take a lot of effort. Outsourcing can be used to alleviate this.
What other options are there for online revenue models? What about blogging, article writing, gambling, trading stocks or subscriptions? Great question. Here are a the basics about each.
- Blogging: blogging isn’t a revenue model. It’s a content delivery platform. Earning money from blogging requires relying on a revenue model (usually one of the above).
- Writing articles: writing articles that you are paid for based on the traffic they generate (Squidoo, Mahalo, eHow, etc.) is essentially a secondary advertising model. These platforms already have an advertising mechanism in place and high search engine rankings. They pay you lower ad rates than you would get if you owned the platform and content in exchange for providing the platform.
- Gambling: unless you can automate a gambling system (which probably isn’t legal), you’re trading time for money.
- Trading stocks/currencies: again, if you can’t automate your trading activities, you’re trading time for money. If you can automate it (and actually earn a living), congrats but beware of hidden risks.
- Subscriptions: a subscription model can be a fantastic way to earn recurring revenue. In essence, subscriptions are a recurring mechanism for selling products or services.
What about mixing models?
Mixing various revenue models is both wise and relatively common. If your goal is to create somewhat passive income streams, but you need to make some income right away, starting with selling services and transitioning to products or affiliate marketing might be a good way to go.
Working with clients hands-on in the beginning by providing services can be a great way to conduct market research for products you’ll eventually create. Jumping right into creating a product without connecting with your potential market first can end up being a big waste of effort.
Which revenue models do you prefer? What is the best model (or combination of models) for a lifestyle business (no employees, time/location flexibility)? Other questions?
Please share your thoughts in the comments. I’m happy to answer any questions you might have as well.
photo by HckySo