Ad-based versus direct monetization: Which one is better for you?

Direct monetization models versus indirect monetization
To restate the general argument in my own terms, there are basically two kinds of companies on the internet (and btw, I’ve discussed these two groupings of companies at my talk at Startonomics – you can check out the video here and the slides here):

• Direct monetization, aka Advertisers: Direct monetizers charge money for their products, via subscription, ecommerce, virtual items, etc. They typically have a small, focused group of customers.
• Indirect monetization, aka Publishers: Indirect monetizers don’t charge money to use their product and in fact, often give their product away. They chop their audiences into pieces (using content to differentitate between them) and sell the targeted audiences to companies who directly monetize them.

Now note that Direct monetizers and Indirect monetizers have very different problems:

• Direct monetization: The biggest issue is cost per acquisition and limited size of their customer base.
• Indirect monetization: The biggest issue is zero cost user acquisition and identifying user intent (via targeting)

My comments: #1:

I love how you point out how the monetization method really has to fit the product, audience and the company’s goals. Talking about Facebook, Twitter et. al. really neglects the wide range of companies creating value for users in their own way, each trying to figure out the right way to provide services, sell products, gain users and make money in their own way.

I wonder if a big part of the attraction towards indirect monetization is that people are unsure how to set prices? Indirect monetization, especially advertising-based, comes through a largely passive acceptance of market rates, whereas direct monetization requires companies to set (and justify) the prices for their products and services. Are we scared to set prices?

… and #2:

Solid point: that’s two pretty big steps. There’s a reason we do things the easy way first: it makes sense, and people (users, investors, seller, buyers, advertisers, entrepreneurs) are used to the model of activity.

Do the steps have to be sequential (instead of simultaneous)? Separating the two also leads to a lot of effort spent creating products and services that people don’t really value (i.e. that they wouldn’t pay for). Isn’t the problem on hand to solve real people’s problems? To create things they want?

Setting prices is like setting a bar for what you’re creating: if someone wouldn’t pay for it, is it really that valuable?

In any case, indirect monetization isn’t a new business model, and it’s been the base of huge industries for many, many years, and will continue to always be a valuable method for monetizing things people want. But it’s not the only way.

–

Andrew Chen’s blog is a great place to read about viral marketing, gaming and the Internet business revenue models…