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.
Business Model Explorers
The hidden revenue generation model in a nutshell
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 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:
In other cases, If I search “what’s the weather tomorrow,” rather than showing me advertising, Google will give me a direct answer:
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:
Make the service/product at least 10x better than anyone available
Make it free and frictionless
Use gamification to make users come back
The critical ingredient is the variable reward you give to users
Find a partner that can finance your business for a few years so that you can experiment with monetization without impacting the user experience
Build a solid brand
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
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.
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 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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Related Business Model Types
Platform Business Model
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
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
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
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
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
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
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
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
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
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 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
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
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
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.
