Also called: Advertise model, Free as a business model
See also: Multi-Sided Market
|Key Partners||Key Activities||Value Propositions||Customer Relationships||Customer Segments|
|Cost Structures||Revenue Streams|
How: The user is not the customer. Instead, revenue comes, in part or entirely, from a third party who finances the product or service that attracts the user, which the Hidden Revenue is dependent on.
Why: By extracting value from its users, the business is dependent on delivering on a value proposition that attracts as many qualified users as possible.
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A Hidden Revenue business model is a pattern for generating revenues that does not involve users paying for the service or product offered.
The Hidden Revenue model departs from the traditional approach of relying solely on the sale of products or services for revenue. Instead, the primary source of income is derived from a third party, who cross-finances the attractive free or low-priced offerings made to customers.
One common application of this model is the integration of advertisements into the offering, thereby attracting customers to the advertisers who fund it.
The biggest advantage of the Hidden Revenue model is that it provides access to an alternative source of income, which can supplement or even wholly replace the revenues generated by the conventional sale of products. Additionally, obtaining financing through advertising may also have a positive impact on the original value proposition, as many customers may be willing to watch a few ads in exchange for a better deal on goods or services.
This business model is commonly employed by companies that offer free services on their platform. The goal is to remove the user from the revenue generation equation, while still making revenue through the users by charging third parties.
User Actions with potential revenue benefits - undisclosed to the customer
Customers are able to use the company’s services without paying, but any actions they take on the platform have the potential to generate revenue for the service provider. This means that the customers do not directly contribute revenue to the company.
Additionally, customers are unaware of whether third parties are paying for their actions on the platform. As a result, the revenue generation is not disclosed to the customers. They are able to use the platform for free, while the company uses their actions to generate income from third parties without disclosing this to the users.
Where did the Hidden Revenue business model pattern originate from?
While ancient civilizations such as the Egyptians utilized forms of advertising, the practice of using ad sales as a primary source of revenue is a relatively recent development.
The earliest instances of ad-based funding can likely be traced back to the bulletins distributed in the seventeenth century with the advent of the printing press. These bulletins often contained public announcements, court hearing schedules, obituaries, and paid private and commercial classifieds. The classifieds business was so lucrative that many bulletins were financed almost entirely by it. The modern iteration of these bulletins can be seen in the ad flyers commonly received at homes today.
Applying the Hidden Revenue business model
The potential of the Hidden Revenue business model was often overvalued in the early years of the new economy, leading to numerous companies being valued highly despite their inability to generate significant revenues.
Assessing the viability of Hidden Revenue remains challenging to this day. One notable example is Facebook’s acquisition of the WhatsApp messaging service for a staggering $16 billion.
At the same time, customers have become increasingly wary of Hidden Revenue. In Germany, for instance, where consumer concerns about the misuse of sensitive data are particularly pronounced, every third WhatsApp user considered leaving the service following the deal with Facebook. Despite these challenges, Hidden Revenue remains popular in advertising and customer data trading.
The three parties of the Hidden Revenue business model
The Hidden Revenue business model involves three parties:
- The Company. The company creates a product or service that customers can use to achieve a certain goal, but does not charge the customers any fee for using it. However, the company generates revenue through these products and services from other sources.
- The User or Customer. The user or customer uses the product or service for free and interacts with it, performing desired actions without incurring any cost.
- The Third Party or Publishers. The third party or publishers cater to the costs and pay the company to access its customers. These parties need access to the platform’s audience to promote their products and services, and are willing to pay the platform owner in order to gain access to its users’ interactions.
The main objective of the Hidden Revenue business model is to separate revenue generation from the customers. This allows the company to make the platform user-friendly and effective while the third party pays more for the growing audience.
Benefits and challenges of the Hidden Revenue model
The Hidden Revenue business model is a strategy that can offer benefits to all parties involved. However, it is not a perfect model and has its own set of drawbacks. Before deciding to utilize this model, it is important to consider both the pros and cons.
Benefits of the Hidden Revenue business model
- Enhanced Revenue Generation. The Hidden Revenue model can increase revenue generation for a company, as it does not rely on customers to earn income. Instead, it focuses on offering free products and services to attract third parties who are willing to pay to access the customer base.
- Opportunity for Sustainable Income. Implementing the Hidden Revenue model can increase a company’s chances of achieving sustainability, as the number of customers will continue to grow as long as the company offers free services. This means that more publishers will be seeking access to the customer base, providing a source of sustainable income for the company.
- Chance to Offer High-Quality Products and Services. By separating revenue generation from the customer base, the Hidden Revenue model allows a company to focus on improving its products and services in order to attract more customers and increase revenue from third parties.
Challenges of the Hidden Revenue business model
- Heavy Reliance on Third Parties. While the Hidden Revenue model can be a useful strategy, it also puts a company at risk by relying heavily on third parties rather than customers. Even though third parties are paying for access to the customer base, the company must maintain high-quality products and services to retain customers. This can be a heavy burden for the company.
- Risk of Compromising Customer Privacy. Despite offering free products and services, the Hidden Revenue model carries the risk of compromising customer privacy. The company may be tempted to share private information with third parties without the customers’ consent in order to maximize its earnings. This can damage the company’s reputation.
- Can you commercialize your assets in a way that separates customers from the revenue stream?
- Can the trustworthiness of your customer relationship be influenced by Hidden Revenue streams?
- Is it possible to disconnect customers from revenue streams?
- Is it feasible to monetize our assets through alternative methods?
- Will we be able to retain our existing business relations and customers even if we exploit additional Hidden Revenue streams?
While remaining free to use, revenue comes from allowing companies to create targeted advertising.
Its range of free services is cross-financed through ads and harvesting data for optimizing return on advertisement spend.
This company provides innovative advertising systems for public “street furniture,” such as bus shelters and Self-Service bicycles, in exchange for exclusive advertising rights. Advertisers pay for prime locations and transit media opportunities, while cities benefit from the free or discounted public services. JCDecaux generates annual revenues of over €2 billion through this model, making it the largest outdoor advertising corporation in the world.
Free Daily Newspapers
These newspapers are funded entirely through advertising and typically achieve high circulation, which in turn boosts advertising rates. Media company Metro International is a pioneer in this field, with its eponymous free daily newspaper being one of the most frequently read papers in the world.
This company provides ad-funded Internet television through its website and mobile apps. Customers sign up on the website to access a variety of television channels via web streaming, with Zattoo selling advertising space to cover operating costs. Zattoo is now Europe’s largest live-web TV provider.
This is a special version of the Hidden Revenue model that is adapted for the Internet. Ads are tailored to specific target groups to increase efficiency and avoid waste coverage. Google has successfully implemented this model through its AdWords program, which allows companies to purchase targeted ads that appear in search listings based on the user’s search terms. Google generates billions of dollars in revenue every year and maintains a market share of over 60% in the online advertising business.
- Business Model Navigator by Karolin Frankenberger and Oliver Gassmann
- What Is a Hidden Revenue Business Model? Google's Business Model Explained by Gennaro Cuofano
- Hidden Revenue Business Model: What Is It And How Does It Work? by Business Strategy Insights
- Google Business Model – A Hidden Revenue Model by Gary Fox