The success of any business lies in its ability to generate revenue. Any venture must develop an approach to ensuring a consistent cash flow to finance its expenses and retain some profits.
Some businesses opt to create products and services that they sell to customers. Others develop a platform and charge anyone who wants to use them. Also, some businesses offer platforms that allow customers to access different types of content without paying a dime. However, such companies still make some revenues.
But how is that possible? The secret is the use of hidden revenue business model.
What is the Hidden Revenue Business Model?
Hidden revenue business model is a common strategy for companies offering free services on their platform. The goal is to remove the user out of the revenue generation formula. However, they make revenue through the users by charging third parties.
The customers use the company’s services without paying a dime. But any action they take on the platform has a potential revenue benefit to the service provider. In other words, the customers do not contribute revenue to the company directly.
Also, they do not know whether third parties are paying for their actions on the platform. This means the revenue generation is not disclosed to the customers. So, customers use the platform for free, the company utilizes the users’ actions to make money from the third parties without disclosing the same to them (users).
How Does the Hidden Revenue Business Model Work?
As the term suggests, the revenue generation in this type of business is hidden. The model involves three parties. The first party is the company that creates a product or service that customers can use to achieve a certain goal. But it does not charge the customers any fee for using their products and services. However, it generates revenue through these products and services from other sources.
The second party is the user or customer. This party uses the product or service for free. They interact and perform their desired actions on it without paying any cost. The last party is the third party or publishers. This group cater for the costs and pay the company to access its customers.
The third parties need the platform audience to promote their products and services. So, they pay the platform owner to gain access to its users’ interactions. The main objective of this model is to separate revenue generation and customers. This way, the company can make the platform user-friendly and effective while the third party pays more for the growing crowd.
Examples of Hidden Revenue Business Model
The Hidden revenue model is a common approach in technology, media, and digital industries. It is the primary model that proprietors in these niches utilize to make money. For this reason, there are many examples of companies utilizing this model in this era.
Google and Facebook are among the notable brands using the hidden model. These tech giants offer their platforms for free. You do not pay any dime to create a profile or page on Facebook. Google does not charge you to search for information or videos on YouTube.
However, as you scroll through the Newsfeeds on Facebook, you come across the sponsored ads. The same case happens where ads will pop up as you watch videos on YouTube. Sometimes, you click these ads when you see something interesting. When you do so, Google and Facebook charge the advertiser for that action. So, they make money from your actions.
Another example of this concept in practice is in the media arena. TV and radio stations do not charge you to listen to or watch their programs. You watch your favorite programs 24/7 without the TV station sending you a bill. The same case applies when listening to the radio.
Sometimes you wonder how they generate revenue. These stations feature ads and promos from advertisers. Whenever the station features or broadcasts such items, the advertiser pays the bill. So, they pay to reach out to the TV or radio audience and take their marketing message to them.
Pros and Cons of the Hidden Revenue Business Model
The hidden revenue business model is a powerful strategy where every party involved reaps some benefits. However, it is not a pure model as it has its shortfalls. Before considering it, you need to understand both sides of this model. Here are some of its pros and cons:
Enhanced revenue generation
Every company seeks to boost their earnings. When joining the entrepreneurial field, your dream is to maximize profits. However, this relies on your business model. The hidden revenue model enhances revenue generation since the company does not rely on customers to earn income. So, it focuses on offering free products and services to its customers, attracting many third parties paying to access the crowd.
Opportunity to have sustainable income
Sustainability remains a central objective for many businesses. However, only a few achieve it. Implementing the hidden revenue model can boost your sustainability chances. Since you are offering free services, the number of customers will continue growing. So, more publishers will be seeking to access them, guaranteeing you some sustainable income.
Chance to offer perfect products and services
The model separates revenue generation and customers. This means that a company does not rely on customers to make profits. So, it can focus on bettering its products and services to attract more customers and enhance revenue from third parties.
Heavy reliance on third parties
While it is a good idea, it puts the company at risk by relying heavily on third parties than the customers. Despite third parties paying the bill, the company must keep the product and services up to the standard to retain customers. This aspect makes the burden heavy for the company.
Chances for compromising customer privacy
Regardless of the free services and products, this model opens room for customer privacy breaches. The company is likely to share private information with third parties without the customers’ consent to maximize its earnings. This act can ruin its reputation.
In a word, the hidden revenue model is a perfect idea. It helps a company earn revenue without charging its customers. This approach helps it to enhance its customer base. However, privacy issues and over-reliance on third parties are some of the shortfalls of using this model. So, you need to know about them before opting for it.