hidden-revenue-model-google

What Is a Hidden Revenue Business Model? Google’s Business Model Explained

A hidden revenue business model is a pattern for revenues generation that keeps users out of the equation so they don’t pay for the service or product offered. For instance, Google’s users don’t pay for the search engine. Instead, the revenue streams come from advertising money spent by businesses bidding on keywords.

Let’s see more in detail how Google managed to create a business model worth almost a hundred billion dollars in revenues. In fact, to unlock so much financial value, a proper business model has to have an appealing value proposition for several key stakeholders.

Google’s Win-Win-Win Value Proposition

As of 2017, over ninety billion dollars, which consisted of 86% of Google’s revenues came from advertising networks. How did Google manage to be so financially successful and sustainable over time? The answer lies in a compelling value proposition for three key players.

RelatedHow Does Google Make Money? It’s Not Just Advertising! 

Users: I can find an answer to anything

Google is the most powerful search engine in the world. However, it was not the first. In fact, when it appeared on the scene, in the late 90s, it was one of the latest search engines. However, thanks to a powerful algorithm, called PageRank it soon took off. Initially, it was not clear how the search engine was supposed to make money. One thing was clear for its founders though: it was supposed to be free for its users.

In fact, the billions of people that each day use Google are what makes the search engine better and better. In fact, Google uses that data to tweak its search algorithm, to make it able to read, interpret, understand and process users’ queries.

But if users aren’t paying, who’s paying for it?

Businesses: I get more sales through targeted Ads

Google uses an advertising business model, where companies take part of an ad network called AdWords. In short, they can bid on keywords (such as “car insurance”) to sell their products and services. This model works quite well as it allows those businesses to track their ads results, to offer their ads to interested users (in fact, through tracking Google can understand what users might want) and pay based on what users click through.

This compelling value proposition made Google profits grow quite fast. However, there is another critical piece of the puzzle: publishers.

Publishers: Easily monetize my content

Each day millions of new articles are written on the web. But why so many publishers hit the publish button? Of course, it has never been so easy to provide information. In fact, today thanks to the internet anyone can become a publisher. However, as Google powerful algorithm can index the whole visible web, it also becomes harder for publishers to be featured through it.

Thus, it makes sense for small and large publishers to compete and create “content factories.” In fact, the more content they create, the more chances they get to be featured on Google. But what for?

A significant payoff for publishers to be featured by Google is of course visibility. In fact, many publishers monetize mainly through traffic. Second, and most importantly: money!

Indeed, those same publishers can “rent” part of their web pages space to Google to place banners from businesses part of the AdWords network. When users browse the pages with banners or click through them, those publishers can finally monetize their content. (this is called AdSense)

To have a better understanding of the whole Google’s networks check this:

Google Business Model Analysis – Updated 2022

The overall network ability to generate value is summarised below:

googles-business-model

That is how Google through its hidden revenue business model was able to become a tech giant. The business model worked so well that made Google so big and powerful, which over time some concerns have grown.

Google’s business model? Not without a flaw

An advertising model based on hidden revenue generation might carry some flaws. In Google’s specific case below some of the flaws.

Asymmetry toward users: You give me data, I make money

That is true that users don’t pay, but in the process, they do offer to Google valuable data. Some argue whether that data should be given back to the same users in some ways.

Biased content: Is content that targets keywords really relevant?

Publishers are incentivized to produce content, which might not always be the best form of information. In fact, although Google’s original mission was to organize the world’s information, its business model became so effective to influence it eventually. In fact, today many publishers follow SEO guidelines to make sure to comply with the way Google’s algorithm works.

We can then argue, whether Google’s algorithm gives back the best content or the content that best fits its guidelines. That is not an easy answer to that and of course, in most cases, I believe Google does an incredible job.

The web as a giant billboard: Is this indeed the web we want?

When Google finally opted to adopt an advertising business model the web suddenly became a giant billboard. Many argue whether or not that is the way the internet was supposed to be. It’s interesting to see the point some internet visionaries expressed on Wired when they said: “the internet is broken.

Privacy concerns: Do you really have to track me?

As users become more and more aware of the data that Google collects from them it raises questions about whether or not it makes sense for them to keep using it. In fact, other search engines more focused on privacy are growing their users base. That raises an important question.

Is Google’s business model the only possible for search?

Any company sooner or later will be disrupted. At times the paradox is that innovation comes from going back to the past. In fact, alternatives like DuckDuckGo (a search engine that doesn’t track its users) argue whether a search engine has to track its users. In fact, search engines like DuckDuckGo get a growing piece of the search pie by focusing on those concerns. Indeed, its founder, Gabriel Weinberg argues that a search engine can make money without tracking its users.

That means as users become more sophisticated privacy becomes a new value proposition as powerful as monetization. That, of course, would undermine the basis of a hidden revenue model built on users’ data.

Summary and Conclusions

A hidden revenue generation business model keeps users out of the equation, while it lets other parties finance – in part or entirely – the product or service offered. This kind of model works if the value proposition is appealing to several stakeholders. For instance, Google has created a sustainable business model based on hidden revenue generation, by creating a compelling value proposition for businesses and publishers. The former can bid on keywords and generate sales through targeted ads. The latter can effectively monetize their content.

Google’s hidden revenue business model has become so powerful that of course has shown some flaws. The paradox is that from what a few years back was an innovative model that is now creating opportunities for competitors to come up with alternative value propositions. Thus, if monetization was a strong motivator over privacy, just a few years ago. Now, privacy is becoming more and more important. That leaves space for new players!

Related To Google

How Big Is Google?

how-big-is-google
Google is an attention merchant that – in 2021 – generated $209 billion (over 81% of revenue) from ads (Google Search, YouTube Ads, and Network sites), followed by Google Play, Pixel phones, YouTube Premium (a $28 billion segment), and Google Cloud ($19 billion). Over $31.5 billion went toward R&D (12.3% of its revenues).

Google Traffic Acquisition Costs

what-is-google-tac
The traffic acquisition cost represents the expenses incurred by an internet company, like Google, to gain qualified traffic – on its pages – for monetization. Over the years Google has been able to reduce its traffic acquisition costs and in any case, keep it stable. In 2021 Google spent 21.75% of its total advertising revenues (over $45.56 billion) to guarantee its traffic on several desktop and mobile devices across the web.

How Does Google Make Money

how-does-google-make-money
Google (now Alphabet) primarily makes money through advertising. The Google search engine, while free, is monetized with paid advertising. In 2021 Google’s advertising generated over $209 billion (beyond Google Search, this comprises YouTube Ads and the Network Members Sites) compared to $257 billion in net sales. Advertising represented over 81% of net sales, followed by Google Cloud ($19 billion) and Google’s other revenue streams (Google Play, Pixel phones, and YouTube Premium).

YouTube Business Model

how-does-youtube-make-money
YouTube was acquired for almost $1.7 billion in 2006 by Google. It makes money through advertising and subscription revenues. YouTube advertising network is part of Google Ads, and it generated more than $28B in revenue by 2021. YouTube also makes money with its paid memberships and premium content.

Read Next: Business Model Guide

Related Business Model Types

Platform Business Model

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

Marketplace Business Model

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Network Effects

network-effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

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 Merchant Business Model

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.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

b2b2c-business-model
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

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