How Do Firms Make Money Selling Digital Goods Online?

17 Pages Posted: 6 Dec 2013 Last revised: 28 Apr 2014

Anja Lambrecht

London Business School

Avi Goldfarb

University of Toronto - Rotman School of Management

Alessandro Bonatti

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Anindya Ghose

New York University (NYU) - Leonard N. Stern School of Business

Daniel G. Goldstein

Microsoft Research New York City; London Business School

Randall A. Lewis

Netflix

Anita Rao

University of Chicago - Booth School of Business

Navdeep S. Sahni

Stanford Graduate School of Business

Song Yao

Northwestern University

Date Written: March 6, 2014

Abstract

We review research on revenue models used by online firms who offer digital goods. Such goods are nonrival, have near zero marginal cost of production and distribution, low marginal cost of consumer search and low transaction costs. Additionally, firms can easily observe and measure consumer behavior. We start by asking what consumers can offer in exchange for digital goods. We suggest that consumers can offer their money, personal information, or time. Firms, in turn, can generate revenue by selling digital content, brokering consumer information, or showing advertising. We discuss the firm’s trade-off in choosing between the different revenue streams, such as offering paid content or free content while relying on advertising revenues. We then turn to specific challenges firms face when choosing a revenue model based on either content, information or advertising. Additionally, we discuss nascent revenue models that combine different revenue streams such as crowdfunding (content and information) or blogs (information and advertising). We conclude with a discussion of opportunities for future research including implications for firms’ revenues models from the increasing importance of the mobile internet.

Keywords: revenue models, Internet, online advertising, digital goods, content, information, advertising, cookies

Suggested Citation

Lambrecht, Anja and Goldfarb, Avi and Bonatti, Alessandro and Ghose, Anindya and Goldstein, Daniel G. and Lewis, Randall A. and Rao, Anita and Sahni, Navdeep S. and Yao, Song, How Do Firms Make Money Selling Digital Goods Online? (March 6, 2014). Rotman School of Management Working Paper No. 2363658. Available at SSRN: https://ssrn.com/abstract=2363658 or http://dx.doi.org/10.2139/ssrn.2363658

Anja Lambrecht (Contact Author)

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom

Avi Goldfarb

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-8604 (Phone)
416-978-5433 (Fax)

Alessandro Bonatti

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States

Anindya Ghose

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

Daniel G. Goldstein

Microsoft Research New York City ( email )

641 Avenue of Americas
New York, NY 10011
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 0 20 7000 8611 (Phone)
+44 0 20 7000 8601 (Fax)

HOME PAGE: http://www.dangoldstein.com

Randall A. Lewis

Netflix ( email )

Los Gatos, CA
United States
312-RA-LEWIS (Phone)

HOME PAGE: http://www.econinformatics.com/

Anita Rao

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Navdeep S. Sahni

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Song Yao

Northwestern University ( email )

Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
United States

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