Cyberprofits: Six Ways Businesses Are Making Money On The Net, by Wally Bock

In a recent article, Forbes Magazine made the assertion that nobody was making any money on the Net or the Web. The exception that they made was people who are consultants and writers and putting up Web site designers and so forth. Even then, they're wrong.

There are lots of people making money out there on the Web. To understand who they are and what they're doing you have to begin with an understanding of what "making money" really means.

I'm going to refer to making money as "making a profit." If you'll remember from your basic business classes, profit = revenue - expenses. Most of the articles that are out there on the Net and the Web and doing business on them make the same mistake that Forbes did. They confused profit with sales.

There are people selling things on the Web and in fact making some money at it. But they are only a portion of the people who are increasing their profits by being on the Information Highway. In fact, there are six basic models for increasing profits on the Web that I've discovered in my research.

The six basic models are:

• Transactions -- completing sales and other transactions on the Net.
• Subscriptions/Memberships -- specialized information available to people who pay for it.
• Advertising -- delivering an audience in return for payment.
• Net Related Services -- consulting, Web design, etc.
• Cost Cutting -- using the Net and the Web to automate business processes and save money.
• Enhancing Other Operations -- using the Net and the Web to improve things that you do elsewhere.

Hardly any of those models are used all by themselves. Most business that are using the Net and the Web effectively use a combination of the different models to meet their specific needs. Let's look at the models in detail.

Transactions

There are sales transactions happening out there on the Web. For the purposes of this article, let's say that a sales transaction involves the taking of an order online.

In some cases, in addition to taking the order, a business actually receives payment. To do that they need some kind of secure transaction method or a willingness on the part of the buyer to risk a transaction without that "security."

This is still something of a sticky area online. While there are several schemes out there that actually work for secure transactions, the state of the art -- at least in practice -- is not ready for secure transactions yet.

There are methods that are in place, but on which standards have not been agreed, for third party verification, secure transmission, and digital cash. You can expect that in the next year or so, several of these methods will become common and the critical vendors in each area will move to the top of the pile. Until then, people will still be nervous about buying things online and using their credit cards.

Another issue here is that people just take a while to get used to new ways of making payment, whether those ways are actually dangerous or not. Probably the most dangerous thing you can do with your credit card, for example, is use it in a restaurant. Yet, millions of us do that every day. The reason that we're willing to take that risk is that we understand the magnitude of the risk and we've developed a habit of using our credit cards to pay for things.

When we first had telephone ordering in response to ads, people were nervous about that too. The same thing was true when we first started having automatic teller machines. And some folks are still leery about automatic direct deposit of their paycheck or government benefits checks. The fact is that it will take it a while for people to get used to the methods that are available even if they are secure.

Of course, if you're a business that generally takes orders via a purchase order from other businesses and then invoices, that procedure will be the same online. The "secure transaction" issue pretty much vaporizes for you.

That brings me to another observation. Many businesses dealing with consumers can make the issue vaporize as well. What they do is they take payment or verify orders via other means. For example, they'll let a customer place an order online and then call to verify the order and take credit card information. Or they'll take an order online that includes the credit card number but call to pick up the expiration date needed to process the card.

One business I know actually sends out small information products with an invoice as the first part of the product. He claims that he gets a 98% payment rate so the whole issue of collection is really moot.

Direct sales is one of the basic ways to increase your profitability online. It works by increasing the revenue side of the profit equation and also by decreasing expenses since overall the cost of taking an order online is far lower than it would be taking it over the phone or even, in many cases, processing a mail order.

Sales are not the only kind of transactions, however. Anytime that a customer, client, prospect, or friend is able to have a request filled, that's a transaction, too. You can use a web site, for example, as a place that customers can get datasheets on a product or service. An autoresponder or ftp can let them retrieve information. A mailing list can be a way to exchange information.

All of these are transactions, but they're not sales. Consider all kinds of transactions when you're looking to improve profits on the net.

Subscriptions/Memberships

When you subscribe to a magazine or a newspaper, you get a benefit by virtue of paying for that benefit. The benefit might be home delivery and the assurance that you won't miss an issue. The benefit might be special information that you get that non-subscribers don't get. It's the same online.

People who subscribe to electronic newsletters being sent over the Internet pay for this security of special information and for getting it delivered directly to them, right to their email box. It's the same way as with home delivery or office delivery of your local newspaper.

Some subscription methods also provide special information just for people who are subscribers. The San Jose Mercury News, for example, has an online edition.

Anyone on the Web can get the basic information in that day's San Jose Mercury. But subscribers get more.

For the extra fee that they pay, subscribers get access to additional information including columnist, background information, and so forth.

This is a lot like the special Forbes ASAP that comes with a subscription to Forbes. Subscribers not only get direct delivery of Forbes Magazine, but also receive Forbes ASAP as an additional benefit.

Not all subscriptions or memberships require payment. Sometimes this same model is used as a way to create a community of people who are linked by their common bond with a particular company, association, or product. Consider the case of Saturn, the auto maker.

On the Saturn Web site you can become a member of the "Saturn Family." All you have to do is sign up. There are no special requirements. You don't have to own the car. You don't even have to be considering owning the car. All you have to do is say that you're interested and Saturn puts you in a group that gets special information by virtue of being a "family member."

Advertising

Businesses make money from advertising by delivering audiences. The reason that the Wall Street Journal can charge thousands for an ad is that advertisers want to present their message to people who read the Wall Street Journal. The reason that ads on top television shows go for millions is that the people behind the advertising want to present their message to the audience that's being delivered by the television station.

There are Web sites that make money this way as well. Almost any popular Web site can sell advertising to people who want to reach people who visit the site.

A good example is Infoseek. This popular and effective search site sells ads to people who know how popular the site is. They even add an extra benefit. An advertiser can pay to have his or her ad given preferential treatment.

What that means is that someone who searches for an item related to real estate might see an ad for a real estate agent or an agent referral service. Another visitor to the site who searches for food and wine might see the ad for Virtual Vineyards. Another visitor, one searching for travel information, would see an ad for American Airlines.

Another form of advertising that's common on the Web is paid links. In this application, a person with a popular site will allow another site to have a link from the popular one. In return for that link they'll charge a small fee. One good example is a site called the Meetings Industry Mall. In fact, the Meetings Industry Mall exists as a business to provide paid links to people who want to reach the people who plan meetings. The site is designed to be easy, effective, and interesting to meeting planners and derives income from selling links to people who want to reach those meeting planners.

Links are generally a whole lot less expensive than full ads but are still another variation of the way advertising helps people make money on the World Wide Web.

Net Related Services

There's a whole business growing up around the Internet and the World Wide Web. It includes Web site designers, marketing consultants, technical experts, security gurus, and just about anyone who's got some special expertise that they can sell to people who need that expertise to build a business on the Net.

One development that we'll almost surely see in the next couple of years is companies who develop expertise for their own internal purposes, selling that expertise as an additional way to enhance their revenue.

Cost Cutting

Right now this is probably the biggest way that people are actually enhancing profits online. The fact is that just about any information-intensive or people-intensive function in a business can be automated to some extent using the Internet and the World Wide Web. When that happens, costs can drop dramatically.

Take the simple process of ordering through an 800 number. There are lots of businesses out there who take orders over the phone and the average cost to process such an order is about $15 per order.

Moving to the Net can automate a huge chunk of that ordering process. The actual browsing through the catalog and selecting items of interest is done by the person visiting the site or receiving the mail catalog. If they go to a Web site to place their order, they are the people selecting the options, entering the information, and checking the details. The order is then transmitted automatically.

Let's look at what happens. Instead of having an individual sitting at one end of a phone line looking at a catalog or reading off a computer screen, we have all of that information processing handled by the buyer his or herself. That means that buyers aren't limited to just what the particular sales person wants to tell them. And they don't have to depend on that sales person being in a good mood.

On the business side, the cost reduction is dramatic. The processing cost for an order taken online is probably around $4, a lot less than the $15 for other methods.

There are lots of customer service applications that can be handled online as well. That's because they're order or people intensive. FedEx has a great example.

FedEx was one of the first organizations to go online with a significant customer service function. They set up a way for customers to track packages at the FedEx Web site.

Now this is a stunning benefit for customers. I've used this frequently. It takes me about three minutes to sign on, type in my package tracking number, get the information, and sign off. That's far less than the usual amount of time I'm actually on hold.

In addition, I get all the information relative to the trace. All of the arrive and left times at various points along the way including the van on which my package might have been loaded. If the package is delivered I find out where and who signed for it.

And all that information is available to me now in digital form. With a bit of cut and paste I can take the information and send it to a client who asked me to trace a package. I can file it away in a paper file or in a digital file to refer to later.

That's a big benefit to me and hence a benefit to FedEx in terms of increasing customer satisfaction. But the other benefit to FedEx is purely financial. While they're not releasing any numbers officially, we know that 70-80% of the cost of a customer-service function like this is involved in the personnel cost. In other words, it pays for people who sit in front of computer screens and read information to other people who call in. The more of those functions that can be automated through the Web, the lower the overall processing costs for that customer-service function become. Wow!

Enhance Other Operations

In addition to all the ways we've talked about so far, the Web can be a major enhancement for other parts of your operation. The information on the Web, for example, might make your sales process more effective or make the job easier for your customer service or installation engineers.

Consider a story related to IBM. That company sells a laptop computer call a Think Pad. Sometime back an industrial buyer was looking for several Think Pads and in the course of the buying research came upon the IBM Web site.

At that time, the purchasing agent really wasn't thinking much about IBM, a competitor was the leader in the order chase at that moment. But by being able to visit the IBM site over a number of different times and to gather information at each time, the purchasing agent decided that the Think Pad was the correct notebook computer for this application.

At that point, the purchasing agent picked up the phone and placed a call to a local IBM sales office. The sale actually happened through the sales office, through traditional channels. All the things to make that sale work had happened through the World Wide Web.

Consider things like industrial relations. Having information about financial performance, company policies, and so forth on the Web site is an easy way to make them available to people in depth. In addition, you can provide information that they can get to in a number of different ways.

What about customer service? Many companies have hundreds if not thousands of spec sheets for various products that they've built over the years. Putting those on the Web at minimal cost makes them available 24 hours a day, seven days a week to the people who may need them to either use or repair the products they cover. Now look at that application for a second. It's an enhancement of customer service, to be sure. But it's also a way to cut the costs of distributing those specification sheets.

Look at these six models that we've talked about here. Each of them stands alone as a way to either increase revenue or decrease expenses or both. But they're most powerful when they're used in concert. Used together, these models can be a powerful way for your business to increase profitability.

The exact way that you apply the model will vary a lot depending on your business and your business goals. We can be sure of one thing. We can be sure that you'll find something here that will help you increase your profit and make your business better.