The discussion this week - social sites business model shows how many apparently “free” online services keep their business operation sustainable with many creative solutions. Partly due to the relatively low barrier to entry in the online marketplace than the brick and mortar counterpart which increase competitions. We have examined over a dozen of social sites this week and looked into their company history, revenue model and even exit strategy (selling the company). Most of which depends on advertisement income to fuel business operation to offer free service to customers such as google, youtube and hotmail just to name a few. Others have more creative solutions such as Farmville by Zynga that provides a virtual market place for players to purchase virtual items. Second Life by Linden Lab exemplified this revenue model to include virtual apparel items (clothing, shoes, necklaces, watches, bags, etc.) as well as virtual lands known as Grids. Developed land space can be sold or rented out for virtual businesses that run by virtual currency “Linden Dollars”. Of course, real money can be used for purchasing virtual currency to be used in virtual environment that brings in income to the company.

Another kind of prominent example of “freemium” revenue model relies on the incentive of free services/products in hope of charging customer more advanced features of the same services / products. This model predates the internet business era where business offers free samples of their services/products to potential long term customers. The serves as a try-before-you-buy advertising scheme.  Take Skype for example. Only 12% of its customer base is paying customers and the rest use their service for free but still managed to generate $45 million dollars of profit in the third quarter of 2008. (http://www.freemium.org/wp-content/ebook-101.pdf). Some are with even lower paying customer percentage but nevertheless remains a profitable business (http://tynerblain.com/blog/2009/02/24/freemium-model/). Clearly freemium is a sustainable businesses model that rivals premium in earning potential (http://www.readwriteweb.com/mobile/2011/07/freemium-beats-premium-in-revenue-earned.php).

Some business relies entirely on the altruism and generosity of its users through donation of money. Wikipedia is the clear winner in this case. US $16 million dollars was raised by January 1^st 2011 from the 2010 Wikipedia fundraising event. Since Wikimedia Foundation is considered a charity (http://www.charitynavigator.org/index.cfm?bay=search.summary&orgid=11212), an non-profit organization so perhaps it is not fair to compare other for-profile business models in terms of revenue generation power.

All in all I think that the shift to a highly competitive and low barrier to entry online marketplace is burgeoning with creative and innovative business ideas. The recent Cloud Computing movement (http://raydepena.wordpress.com/2011/01/01/90-cloud-computing-companies-to-watch-in-2011/) would prove a more exciting future of the internet to offer businesses a low startup cost alternative.

Dickson