According to DonDodge (2007), venture capitalists tend to be fans of ad-driven sites since advertising revenue theoretically covers the cost of giving away a Web service free, and free sites attract users much faster than sites that charge money. Such sites are typically also cheap to run because there is often no need for customer-service agents or costs for physical goods. So such companies can have high profit margins if they succeed. Many of today's hottest Web properties are based on the online-ad model, including Google Inc., which pairs ads with search results, and social-networking site Facebook Inc.
Here are some web 2.0 revenue models suggested by DonDodge (2007):
Freemium - The Freemium model, upselling from free to premium
services is a good model. Many of the widgets provide a free service with options to buy premium services such as more detailed traffic statistics, more powerful services, enhanced customization, or higher levels of service.
Transactions - Direct selling to your audience, affiliate marketing ala Amazon.com, finders fees, or percentage of sales, are all good models for certain types of services.
Subscriptions - Yes, people will buy subscriptions to software, services, and high quality content. There are some great businesses built on subscribers.
Advertising can be a component of any revenue model that includes a large targeted audience, but it shouldn't be the only path. There are only so many ways to split the advertising budget pie...and the big guys are getting most of it. Web 2.0 entrepreneurs need to think creatively about all the possible revenue streams.
I think an open API that enables third party access and development of applications and services would be another, where the company can earn from some sort of revenue sharing plan, like what Facebook and Apple are doing.
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