advertising-industry

What Is The Most Profitable Business Model?

The hidden revenue generation model is among the most profitable patterns for business models built on advertising. In fact, businesses like Google and Facebook have managed to gain more than $290 billion in 2021 from advertising on their platform, even though many users might not be aware of the mechanisms that drive those platforms.

The hidden revenue generation model in a nutshell

history-of-facebook
Starting as a social experiment, at Harvard University, back in 2004, Facebook quickly expanded to reach over 1 million monthly active users by the end of the same year. By early 2005, Facebook was already present in 800 college networks. By 2012, as Facebook got ready for its IPO, the company reached over a billion monthly active users.

On this blog, I analyzed dozens of business models. From tech to luxury, retail, and many others.

I found that the most profitable business models are those able to “hide” their revenue generation strategies from the people that use those services.

This is particularly true for the tech industry. In short, the mechanism is the following: the company creates a compelling service, it makes it free so that it can start gathering users’ data.

That data becomes a massive repository that the company uses to study and understand what users might be looking for. It then matches that information with an existing business so that it can get paid for visibility to those businesses or for a cut of the revenues.

This hidden revenue generation pattern is something that tech companies like Google and Facebook have mastered.

This digital advertising duopoly has produced more than $130 billion in 2017 from digital advertising!

Other companies like Amazon are joining in to start selling advertising on their platform and compete with the hidden revenue generation economy.

This kind of model doesn’t seem so different from the traditional media model, or is it?

Why hidden revenue generation plus technology makes it so powerful

google-business-model
Google is a platform, and a tech media company running an attention-based business model. As of 2021, Alphabet’s Google generated over $257 billion in revenue. Over $209 billion (over 81% of the total revenues) came from Google Advertising products (Google Search, YouTube Ads, and Network Members sites). They were followed by over $28 billion in other revenues (comprising Google Play, Pixel phones, and YouTube Premium), and by Google Cloud, which generated over $19 billion in 2021.

Companies have become massive collectors of data.

While though in the past the data collected might not have been useful at all.

That dada has instead become the most critical asset.

As companies like Google and Facebook develop powerful algorithms powered by massive amounts of data and driven by AI and machine learning, those algorithms can tap into our intentions, desires, and pain points, to make us become a cash machine.

Each time that I search for something on Google, the search engine knows what’s my commercial intent.

In other words, it tries to read between the lines of what I am searching for to understand whether I need just information or whether I might be looking for a product or service to buy.

In many cases, if my intent can be satisfied via additional information, Google might be sending the user to a website that is part of its organic listing (sites that don’t pay to be featured on Google for certain key terms).

On the other hand, if Google understands I might have commercial intent. In that exact instant will serve a sponsored content that shows on top of all the others, which is a paid result.

That result is there because it might be the one that gets more clicks and offers more money for that key phrase.

In short, imagine the case I’m searching for “car insurance.” This has a clear commercial intent. Google shows an ad right away:

car-insurance-google-advertising-network

In other cases, If I search “what’s the weather tomorrow,” rather than showing me advertising, Google will give me a direct answer:

google-search-result-on-what-is-the-weather-tomorrow

In other words, at the exact moment, we’re typing something on Google, its algorithm is already predicting what we’re looking for and what is my intent!

When a company can tap into users’ intents with such a powerful mechanism, it becomes easy for the company itself to give its users what they want, without ever having them ask, “what’s in it for you?”

This is the crucial ingredient of the hidden revenue generation model.

How do you build a hidden revenue generation business?

If you’re only aim is to build a profitable business, the hidden revenue generation mechanism might be the most effective way to build up a high-margin business that can become a cash machine for years to come.

In this context, you need several pieces to make this happen:

  1. Make the service/product at least 10x better than anyone available
  2. Make it free and frictionless
  3. Use gamification to make users come back
  4. The critical ingredient is the variable reward you give to users
  5. Find a partner that can finance your business for a few years so that you can experiment with monetization without impacting the user experience
  6. Build a solid brand
  7. And keep improving your algorithms to make your service or product more and more relevant to your users

When those steps/ingredients are in place, you might be on the right track to building a profitable business that follows the hidden revenue generation pattern!

The reshaping digital marketing industry

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.

It’s worth highlighting, that in the later years, the whole digital marketing industry has been reshaped. 

Privacy issues, privacy policy changes of Apple, new competitors, and attention from regulations has threatened the survival of some of these hidden revenue business model

For instance, by 2022, Facebook had to rebrand to Meta, and massively reshape its business model, to survive Apple’s change in opt-in policy, which strongly affected the Facebook advertising machine. 

facebook-metaverse

At the same time, other players, have taken the digital advertising industry by storm. For instance, the TikTok advertising machine is growing exponentially, posing a threat to the Google-Facebook duopoly. 

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.

In addition, for the first time, in the last decade, the competition in the digital advertising space is tightening.

Apple is building a solid business, based on its App Marketplace. And Amazon is quickly expanding its ads business, based on its strong e-commerce platform.

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