Few web businesses have demonstrated that they understand how to monetize traffic, or convert web visitors into revenue dollars, effectively. As a result, many online business models overvalue web traffic and rely on unrealistic planning assumptions. Others are overly reliant on web advertising approaches to generate cash while they struggle to devise other ways to generate revenues. There is limited evidence that this situation will change quickly enough for most of these firms.
- The online revenue model is still in its infancy. It will take at least two years for the industry to figure out value-capture strategies that generate enough revenue to make money and support a large number of Internet businesses.
- Most highly trafficked web sites are unable to generate more than two dollars in monthly revenue per unique monthly visitor. This number must grow at least tenfold to support a large and viable web business.
- Only those organizations with massive traffic (the top 25 most trafficked sites) or those with diversified revenue sources will prove viable. Web marketers will need to diversify revenue streams to justify large marketing investments or to simply survive.
- Marketing leadership must focus on new forms of creating and capturing value online to realize profits. Business-planning assumptions have to be revised to factor in the difficulty real organizations are having monetizing traffic.
Still Addicted to Ad Revenue
A large percentage of e-businesses count on online advertising for a significant part of their revenues. According to the Internet Advertising Bureau, there are 4,555 sites that depend on advertising revenue using popular business models including tools, portals, new media, e-promotion, and communities of interest.
Others rely excessively on web advertising approaches to generate cash while they struggle to find alternatives to generate revenues. For example, there have been 3,000 online marketplaces launched in the past several years, and many of them are starving for transactions. These businesses are starting to look hungrily at advertising and catalog fees while they wait for buy-and-sell transaction activity to develop.
Benchmarking Actual Results
To better understand how well online businesses are actually monetizing traffic, IMT Strategies looked at the web businesses that generated the most traffic. We analyzed the 750 most highly trafficked web sites according to the most recent NetValue ranking. The analysis considered every e-business that went public since 1995, focusing on businesses that relied on web traffic for the majority of their revenue stream and excluding software, infrastructure, and “click and mortar” firms that did not rely on web traffic for the majority of their revenues.
We produced an index of 76 dot-coms that were in the business of generating a lot of traffic and converting it into dollars. The index included a variety of business models ranging from portals to new media to online financial services. To benchmark traffic monetization performance of these businesses, we divided revenue (revenue per month) by traffic (monthly unique visitors).
More than 50 percent were generating less than $2 per month per unique monthly visitor with only 12 businesses generating more than $10 per month per unique monthly visitor. The common denominator among these firms is their ability to effectively diversify revenue streams, build massive traffic flows (for example, the top 15 sites), or convert visitors into buyers. Most were online financial services, e-commerce, Internet service providers (ISPs), and online marketplaces.
Current Traffic Monetization Levels Are Far Too Low
In particular, business models that relied heavily on ad revenues showed limited ability to convert. Ad-supported business models average less than $1.90 in monthly revenues per monthly unique visitor. Monetizing traffic at these levels will not lead to sustainable businesses. Why?
- It is well below the market price for buying eyeballs. In 1999, the portal Excite@home was willing to spend $780 million to buy the web traffic of Bluemountainart.com (9 million unique monthly visitors). Excite effectively paid $86 per unique monthly visitors. At $1.90 in monthly revenues per unique monthly user, it would take up to five years to generate $86 in revenue from those users.
- It is also below what many firms spend to generate traffic in the first place. Web marketers can pay more than $2 per click-through to generate visitors via web advertising.
- eMarketer forecasts $6.1 billion in 2000 online ad spending. This cannot support the thousands of businesses that rely on advertising or ad-supported revenue models. If the entire sum were spent with one organization, it would rank 287 on the Fortune 500.
- Ninety-one percent of the indexed firms did not show a profit in the last quarter.
The Bottom Line: Where Does This Leave Online Marketers?
Web marketers must diversify revenue streams to maximize dollars from existing traffic levels to survive. For most, generating traffic is not a realistic option. Domestic Internet growth is slowing, and it is unlikely the market will support many more web sites with massive traffic (in excess of 10 million unique monthly visitors).
IMT Strategies forecasts that it will take at least two years for online revenue models to be mature enough to support many large and profitable web-based businesses. Consumers have been trained to think that all things on the web are free and that information is a commodity. Marketers must change their minds by innovating services and demonstrating value.
E-business leaders must focus on new ways to create and capture value online. It involves thinking differently about the value of information, the evolution of online buying behavior, and payment mechanisms. E-business leaders must get to work proving alternative revenue streams, specifically:
- Improving customer segmentation based on online buying behavior and their perceptions of value.
- Improving versioning techniques that extract the maximum value from content and information.
- Creating sophisticated licensing and subscription models that accommodate the way customers behave online.
- Exploring usage-based payment vehicles that make small transactions simple and economical for buyers and sellers (for example, micropayments, digital wallets, etc.).
- Creating value-added services that use personalized content to help people work, make decisions, and plan and manage projects better.
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