Willingness of customers to pay for convenience

Entrepreneur

The project is a website that compiles videos, tips, articles and other content. The site is aimed at an audience interested in a healthier lifestyle. The way of monetizing the site will be to sell advertising to health clubs, fitness professionals and others that cater to the same target market. This report will analyze this idea to test for feasibility and identify key challenges that could be present. There will be recommendations as well with respect to the future of this website.

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Challenges

There are several challenges that this website can be expected to face. The first is with respect to the idea of being a content aggregator. This is not 1997. Content is not free. Thus, the first hurdle that we will face with this idea is acquiring content. Most high-traffic content sites have established brands and they also have identified means of acquiring content. If we are going to produce our own content, then there will be costs associated with editors, writers, photographers, videographers and designers. While some of these costs can be piecemeal through the use of freelancers, the editorial work will need to be a full-time position. Moreover, there will be challenges associated with maintaining a reasonable standard both of writing and of information.

If the content is going to come from other websites it will need to be licensed. This is also costly, especially if those sites are competing for the same advertising dollars that we are. This is likely to be the case. There is a reason that few companies use this method of content acquisition as their business model. While there are methods of syndicating such content, it can be costly for the acquiring site. The site would need to earn enough from advertising to offset the cost of content acquisition, and there is no guarantee that this is going to be a possible.

The second challenge is the willingness of customers to pay for convenience (Perner, 2008). This is a difficult challenge for any company that is seeking to be a lifestyle site with aggregated content. For any individual topic, a Google search is likely to be more effective for consumers to find what they are looking for, because such a search opens up the entire Internet, whereas just one site is more limited in scope. While the site can benefit from being on the top page of the Google search, this drives traffic rather than makes the site a substitute for a Google search.

What this means for customers is this. The users will be hard to attract, especially in lieu of a hit on Google. The site will therefore be dependent on searching to drive traffic. That makes it more difficult to sell advertising. Remember that traffic is the product and advertising is the revenue stream. Our customers are not the end users but the advertisers. Advertisers are only willing to pay us to the extent that we offer better traffic at a better price than our competitors. Google is the number one supplier of advertising online. If we are competing with them on either price or demographic information, we are going to lose. Further, we depend on them for that traffic. The problem for us is that we are not operating from a position of strength with respect to people who are looking for online ads — we don’t have the traffic, we don’t have the information about our visitors and we probably won’t have the pricing as well. Customers might not be willing to pay us for something they can get from Google or Yahoo for less.

The third challenge is the ability of the site to drive traffic. There is still room, perhaps, for a lifestyle brand website that is focused on information. However, competing against Google and Wikipedia makes it tougher to draw traffic. A large amount of high quality content, however, can make the site an attractive destination. It is challenge, but not one that cannot be overcome. The site has the potential to succeed if the content is good enough. Monetizing that, however, is a tremendous challenge.

If the site is able to draw traffic, it will be because of content and the development of a great brand. That will be a challenge, unless the company already has a strong brand that can be leveraged by developing a superior site. We can also do a lot of work to optimize our search results (Perner, 2008). This is easier said than done, and the search parameters for the major search engines change frequently as they seek to maximize the effectiveness of their algorithms. That said, with search optimization and great content there is potential to generate traffic, because the topics we are intending to cover are universally popular.

Recommendations

Monetizing such a website is very difficult, even when the traffic flow is high. Basically, when it comes to advertising, there are costs involved and tradeoffs that all but eliminate the ability to earn a profit. There is the cost of traffic — server and hosting costs. The advertising revenue from traffic at any level is not likely to be much more than the cost of generating that traffic. This is a function of Google, Yahoo and other online advertising brokers having tremendous bargaining power and them knowing what the cost of traffic is. You, as the website owner, are not going to get much of a cut. Certainly, advertising could pay to run the site but it might not pay much more than that. Thus, while this is one way to monetize the site, it is not likely to be an effective way.

The second idea of monetizing the site is to sell your own advertising. This is pricey, for two reasons. The first is that being online, your traffic is going to come from all over. To sell ads to specific health clubs in certain cities means you need to demonstrate to the customer a large amount of traffic in that city. This is not going to be easy to do. There is going to be a lot of traffic that is from elsewhere, meaning that you are paying server costs for that bandwidth, while not even attempting to collect revenue from those visitors. It is not hard to see how this becomes financially unviable. Remember that collecting from all customers via Google Ads is barely expected to be viable — how are ads from individual personal trainers going to cover the cost of running the entire website.

The third idea for how to monetize the site is to use it to sell things (Perner, 2008). Online sales are one area where sufficient money can be generated to make the site profitable. The site can accomplish this with a couple of different approaches. The first is that the site would use its content to attract visitors (as well as using search optimization). With these visitors, it will be easy to provide an e-commerce client that will allow vendors to sell through the site. The site would take a small percentage of each sale, covering the cost of making that sale and allowing for a markup and a contribution to the fixed costs of running the website in the first place.

This approach is potentially successful because e-commerce allows for the site to earn higher markups than advertising alone. The site is going to be completely different with this approach, because it will have different functionality, higher costs and far higher risk, but the site also has more earning potential. The tradeoffs here are evident, but would need to be explored more fully before a decision would be made. It takes a lot of work to be a relevant player in e-commerce and there are few examples of profitable e-commerce sites that are not aligned with a strong, established brand, but it is possible.

Conclusion

Overall, the business model for the site as proposed looks shaky. When one considers the nuts and bolts of how people make money online in 2013, there is a lot more to it than simply showing up and selling a few ads. Basically, that has never really worked, and the bargaining power of ad sellers is such that the company can only expect to cover the costs of operating the site. Thus, different avenues for revenue generation must be explored.

In this case, e-commerce is the only way of monetizing the site that has significant upside potential. Selling your own ads based on content that you have created is a poor business model. A few sites do this — New York Times is one — but they tend to have great brands and established departments with expertise in selling advertising. To start such a business greenfield, especially when the site has no traffic and is targeting cash-strapped small businesses and sole proprietors for ads, is unlikely to succeed.

The e-commerce concept is significantly more complex but should be given consideration if only because it is the only reasonable way to make money in this business.

Works Cited:

Perner, L. (2008). Internet marketing. Consumer Psychologist. Retrieved May 24, 2013 from http://www.consumerpsychologist.com/intro_Internet_Marketing.html

O’Reilly, T. (2005). What is web 2.0. Oreilly.com. Retrieved May 24, 2013 from http://oreilly.com/web2/archive/what-is-web-20.html


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