advertising-business-model

What Is The Advertising Business Model? The Advertising Business Model In A Nutshell

The advertising business model is a revenue generation strategy supported by the sale of advertising. In general, a business must first establish an audience by generating content or facilitating interaction and then earn revenue by selling access to that audience. The advertising business model has become popular in the web era, where companies like Google and Facebook have been able to build the largest digital advertising machines on earth.

Understanding the advertising business model

The advertising business model has long been associated with newspapers, magazines, radio, television, and any other medium where advertising revenue is critical to the survival of the business.

Today, the model is a staple of many online businesses, from eCommerce sites such as Amazon to search engines such as Google and everything in between. In most cases, the model is only successful if the business can generate large volumes of targeted traffic. Revenue in this context is generated in three main ways:

  1. Advertisers pay website owners to display advertising on their site.
  2. Advertisers pay website owners to refer visitors to the advertiser’s website.
  3. Advertisers pay website owners to display advertising messages with the ability for the consumer to click through to their website.

As more businesses monetize their content, website owners have tried to counter the rising prevalence of ad-blockers by serving native ads which mimic normal content. This, some suggest, has caused an arms race between consumers using ad-blockers and businesses hiding their content behind paywalls.

Despite recent conjecture that it may become obsolete, the advertising business model will continue to be a significant strategy moving forward. Once established, the model enables businesses to make money without the hassle of selling a product or a service. What’s more, advertisers are often willing to pay more for access to a highly targeted or engaged audience.

Four basic advertising strategies

While there are many ways a business can earn money from advertising, the following four categories cover the vast majority of advertisement models in the digital space:

Display advertising

Most of these are banner ads, which have been declining in popularity as consumers become more averse to them. These ads are small, digital billboards placed around content and can be animated or static. They are commonly used to depict a fast visual story that promotes brand identity, with revenue collected according to the cost-per-impression (CPM) model.

Video advertising

Unsurprisingly, video ads are now the predominant form of advertising because they are entertaining and can tell a brand story in a way that a banner ad never could. They are typically shown pre-roll, mid-roll, or post-roll in a video the consumer is already watching. Since they are relevant and contextual, the viewer is more open to watching them.

Mobile advertising

These are optimized for mobile content consumption and include video, app, display, search, and social-based ads. Mobile advertising often works under the cost-per-lead model.

Native advertising

Considered the least disruptive ads because they are incorporated into a piece of content. Like many video ads, native ads are relevant and contextual. They may take the form of videos, photos, or blog posts with a simple text link to the product manufacturer’s website. Google Adsense is one example of native advertising where advertisers pay website owners whenever their ads are clicked on by the user. 

Key takeaways:

  • The advertising business model is a revenue generation strategy supported by the sale of advertising. The business must first establish an audience by generating content or facilitating interaction and then earn revenue by selling access to that audience.
  • The advertising business model is still relevant today as online consumers become more averse to traditional promotional strategies. What’s more, the strategy is attractive to website owners who want to monetize their audiences and earn revenue without the hassle of selling a product or service.
  • There are four general advertising types under the advertising business model: display advertising, video advertising, mobile advertising, and native advertising. Many argue display advertising is now redundant as consumers become savvier and spend more of their time watching videos on smartphones.

Read Next: Google Business Model, Facebook Business Model, Asymmetric Business Models, Attention-Based Business Models, Amazon Business Model.

Connected Business Models

Google Business Model

google-business-model
Google is a platform, and a tech media company running an attention-based business model. As of 2020, Alphabet’s Google generated over $182 billion in revenues. Almost $147 billion came from Google Advertising products (Google Search, YouTube Ads, and Network Members sites). They were followed by over $21 billion in other revenues (comprising Google Play, Pixel phones, and YouTube Premium), followed by Google Cloud, which generated over $13 billion in 2020.

Facebook (Meta) Business Model

facebook-business-model
Facebook, the main product of Meta is an attention merchant. As such, its algorithms condense the attention of over 2.91 billion monthly active users as of June 2021. Meta generated $117.9 billion in revenues, in 2021, of which $114.9 billion from advertising (97.4% of the total revenues) and over $2.2 billion from Reality Labs (the augmented and virtual reality products arm). 

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchants

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Digital Advertising

advertising-industry
The digital advertising industry has become a multi-billion industry dominated by a few key tech players. The industry’s advertising dollars are also fragmented across several small players and publishers across the web. Most of it is consolidated within brands like Google, YouTube, Facebook, Instagram, Amazon, Bing, Twitter, TikTok, which is growing very quickly, and Pinterest.

TikTok Business Model

tiktok-business-model
TikTok is the Chinese creative social media platform driven by short-form video content enabling users to interact and generate content at scale. TikTok primarily makes money through advertising, and it generated $4.6 billion in advertising revenues in 2021, thus making it among the most popular attention-based business models or attention merchants.

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