20 years ago no one was really sure about how to make money on the Internet. At that time the only companies making any money at all were the Internet Service Providers who sold access accounts to the general public. Throughout the 1990s companies experimented with ways to earn money but Websites were often little more than glorified billboards and no one was sure about who was actually visiting the billboards and paying for the ads. Billions of dollars were wasted on advertising in the late 1990s as new technology companies tried to figure out ways to monetize the Web, ultimately leading to the “Dot Com Bubble” and the losses of hundreds of millions of dollars in investor value as company after company failed.
Ultimately two technologies revolutionized the Internet economy: the shopping cart and the paid-click advertising model. Shopping carts were invented in the 1990s but it take dedicated perseverance from companies like Amazon and eBay to build the market place where consumers felt comfortable buying products online. There were many technological hurdles, such as being able to process credit card payments and shipping products at a reasonable cost.
The paid-click advertising model evolved out of search engine marketing. A small company called Goto.com began selling the top positions in its search results on the basis of an auction model. Advertisers bid on how much they were willing to pay for each click to their Websites and they literally bought traffic from the search engine. Goto rebranded itself as Overture and was eventually bought by Yahoo! (which retired its own advertising technology a few years ago in favor of a badly negotiated deal with Microsoft).
When Google saw the success and profitability of Goto/Overture’s model it engineered its own advertising platform, which differed from the Goto model by placing the paid listings alongside (external to) the “organic” or unpaid search results. Over time Yahoo! and other search engines adopted this model because search consumers were less confused by the separated advertising.
Google copied other advertising networks by allowing publishers to place Google ads on their Websites. Google enhanced the model by adding context-detecting technology that allowed for better (and automated) targeting of ads by topic. By the mid-2000s “Ad Arbitrage” had become all the rage. Shrewd publishers saw that they could buy search referral traffic and drive it to sites that were covered in ads; the revenue they earned from the ads more than covered the cost of the advertising they had to buy to get that traffic.
Google and the other search engines eventually caught on to the arbitrage and shut it down by eliminating advertisers who were playing both sides of their networks and by driving up the costs of acquiring search traffic. Arbitrage still happens but at a much less widespread pattern than previously.
And yet now the major advertising networks are hoist on their own petards. As consumers have become comfortable with the online shopping experience they have placed trust and value in many large retailers such as Walmart, K-mart, BestBuy, Amazon, and others. These companies offer products directly to consumers from their Websites. Many of them also offer affiliate programs to Website publishers. Amazon proved to the world that affiliate marketing could succeed by building up the largest affiliate network of all.
So many Websites now offer affiliate listings for products sold by the major retailers that almost no one is able to make any money from affiliate marketing. The successful affiliate marketers either invest their resources in pushing exotic products and services or in acquiring millions of visitors per month to their Websites.
Amazon’s commission structure rewards affiliates who make more sales, so many savvy Amazon affiliates pump up their sales volume with low-cost products just to get into the higher-tier commission plans. There they make their money by selling big-ticket items.
Meanwhile, all this selling and advertising has flooded the Internet with so many offers that consumers cannot demand enough supply. Advertising revenues are declining by consumer visit even as they rise overall. In other words the pie is getting bigger but more and more publishers are cutting into the pie for their pieces. The cost of advertising is declining and therefore the revenue most Websites earn from advertising, either through contextual ads or affiliate links, is also declining.
It may be there will be a market shakeout. In fact, small players leave the market all the time when they fail to make any money. But will advertising revenue be consolidated into the hands of the largest publishers with the most traffic or will small Websites continue to build revenue from advertising-based models? We don’t yet know where things will end up.
The North American market is almost completely saturated. Most consumers have Internet access and are familiar enough with their favorite retailers’ sites that they can go directly to the sources they want. They now have to be enticed to visit new sites by unique, more intriguing products that the major retailers don’t yet offer.
Amazon has invested millions of dollars in building a vendor channel that gives it a percentage of sales from new, unique products. Other retailers may eventually follow suit as the competition for exotic products heats up.
Meanwhile, if you are struggling to make money with your Website, you’ll need to learn the secrets to successful marketing. Build traffic to your site, choose good advertisers who will appeal to your visitors, and work hard to stay ahead of your competitors who are sure to copy whatever you do if they think you are successful.