The rise of technology and the internet has opened the doors for completely online businesses.
Today, all you need to reach an audience is an internet connection and a website. It’s now completely possible for a small business to function and bring in revenue—sometimes a lot of revenue—without ever opening a physical office.
The obvious question to ask is: how do online businesses make money?
Whether you run a brick and mortar business that you want to move online or have an online only business that you’re trying to scale up, understanding the most common sources of online revenue can help you grow your business.
Affiliate links, online ads, and sponsorships can sometimes work to bring in revenue—but it’s difficult to build an entire business with these sources of revenue as a foundation.
Here are five of the most common types of revenue that can lead to a sustainable online business.
- Selling services
- Physical products
- Information products
- Subscribed communities
1. Selling services
If you are a lawyer, personal trainer, business consultant, freelancer, or life coach, you are using a service-based business model.
Service-based businesses exchange time and expertise for money. You find people in need of your expertise and offer your services to them. Help them to solve their problems and begin to build a customer base. Then bring your services online and build your online service business.
It worth noting that service-based businesses don’t only need to be offered online—it’s entirely possible to run a successful service-based business without even having a website (even if it isn’t recommended).
But online marketing gives service providers an opportunity to reach more clients more quickly, which makes it attractive for people running service-based businesses.
If you’re looking to start or expand a service-based business, it’s important to recognize the important limitation of this business model: time. There are only so many hours in the day that you can spend serving clients.
That said, there are a few advantages to a service-based business as well:
- It’s easy to get started: In a service-based business, you sell the expertise you already have. Your only real barrier is acquiring clients (as opposed to building a product)
- You work directly with clients: There’s no substitute for the audience knowledge that comes from working directly with clients. One-on-one work with clients incredibly rewarding and you develop a deep insight and understanding of your audience’s pain points.
- You charge a high hourly rate: If you provide services directly to clients, raising your rates is often a key pricing tactic to increase your revenue. If you have a reliable client base, you can make more per hour than you would working for someone else.
The services model is common for successful online businesses that make money.
2. Physical products
E-commerce is another common model for online businesses that make money. In an e-commerce business, you sell physical products through an online platform.
E-commerce businesses are popular for those interested in how to start an online business from home. However, these businesses are difficult to get started because of the necessary logistics. You have to create, sell, and ship physical products.
Depending on the products you sell, you may also have to:
- manage sourcing materials
- play a role in manufacturing
- manage the shipping and handling of your product
However, if you are able to manage the supply chains and get your business off the ground, e-commerce is a great business model. You’re able to offer a variety of different products to a large audience.
If you manage your margins and scale up your processes, there is no theoretical revenue limit for an e-commerce business. You’re not limited by time in the same way as the ‘delivering services’ model.
Another major benefit of e-commerce is the ability to create repeat customers.
If customers are satisfied and you offer other products they may be interested in, you can grow your business through
3. Information products
Information products are products that exist solely online—and are essentially vehicles for delivering expertise.
If you sell–
- video courses (Check out this ActiveCampaign + Thinkific webinar on how to grow your business with courses)
–you sell information products. Information products have several advantages over other types of online only businesses.
First, information products scale very easily. Once you’ve created an ebook, it doesn’t cost you anything to make another copy of the ebook—but you can sell more copies at the same price.
Second, information products are especially appealing for people who currently run service-based businesses—if you convey your expertise in a product instead of a service, it’s easier to scale up your business.
The downside of information products is that it’s a bit more difficult to get them off the ground.
You need to show people that your expertise is worth money. With a physical product, it’s easy to see what you get in exchange for your money. With an information product, customers put their trust in the creator of the product. Your product has to deliver on that trust.
This increased trust means that an information product-based business requires a bit more of an investment in marketing, especially content marketing.
Still, if you make the investment up front, information products are a great driver for online businesses that make money.
It seems a bit odd to call donations a “business model,” but they are an undeniable source of online revenue.
Charitable organizations have run on donations since before the internet existed. And anyone who has ever listened to public radio has heard pleas for a pledge drive.
But the spread of online communities and development of new donation services has led to a rise in donation-based online only businesses.
Patreon is a great example of a platform that lets people raise significant funds through donation.
On Patreon, content creators exchange premium content for regular donations from their fans (or “patrons”)
This kind of crowdfunding lets artists, musicians, and other content creators generate enough income to make creating new content their full-time jobs.
On the other end of the spectrum, charitable organizations have more fundraising reach than ever before. This allows established charities to expand their reach—most famously through the ALS Ice Bucket Challenge—but it also helps smaller charities get off the ground.
Love Not Lost is a photography charity that takes free, professional photographs of people with terminal illnesses—so that their families have high-quality portraits to remember them by.
The charity is driven by donation, and uses online channels, such as being featured in the YouTube series Tiny Empires or running a popular AMA on Reddit, to acquire donations.
Of course there are limitations to a donation-based business model. Not all business types are appropriate for donations, and there are limits to the revenue you can make through donations unless you go viral.
Still, online donations provide a revenue source that lets non-traditional online only businesses function day-to-day.
5. Subscribed communities
Technically, subscriptions are either a product model or a pricing model.
Plenty of e-commerce businesses have moved over to a subscription model. A company like NatureBox, which provides a regular delivery of healthy snacks, relies on subscriptions to encourage repeat business.
NatureBox’s subscription model comes with some serious perks and products you’ll only find there. (Source: NatureBox)
Similarly, journalism has largely shifted over to a subscription-driven business model. Newspapers like The New York Times or The Washington Post found that a subscription model is more effective than physical paper sales in the digital age.
Keeping a service on retainer or having a regular appointment schedule for clients is, in some ways, similar to a subscription as well.
In addition to these types of subscriptions, which blur the lines between online business models, it’s possible to run a 100 percent subscription-focused business. It’s a bit difficult to pull off, but it’s possible to charge for access to a unique community.
Charging for access to a community is difficult: it requires that you have access rights to a community of people that others find appealing.
One challenge of building a paid community is retaining your customers over time. Technology tools like marketing automation help to overcome this challenge.
This video, from the free course Getting Started with ActiveCampaign, gives you some pointers on how to get started with automation for your business.
Can you bring together a group of experts, or create a “mastermind” on a specific topic? Is there a very small niche of people that could get massive value out of just being introduced to each other?
If you answered, “yes”, it’s possible to create a paid subscribed community. That said, subscribed communities are hard to create, and are easier to develop once you’ve built an online business based on some other type of product or service.
Still, if you manage to get a community off the ground, the community’s value will grow through network effects—the larger the community becomes, the more valuable it becomes to everyone in it.
Conclusion: How online businesses make money
These are five common ways to increase revenue for online or small business owners. Some businesses rely primarily on one type of service or product—others use a mix.
Find new ways to combine the different product and service models and come up with new online business ideas or ways to improve your existing online business.
Regardless of your business type, keep the different business models and types of value in mind. They are useful as you think about growing your business—and learning from other online businesses that make money.