Summary: Donations can help keep a site running, or even provide a salary for the person running it, but need to be handled carefully.
As the name implies, donations are given freely by visitors, who do not get any direct reward in exchange. Instead, the donations go into a general pool which is used to keep the website running, and hence the visitors obtain the indirect benefit of being able to visit and use the site.
Donations are most commonly collected by not for profit websites, such as Wikipedia, which has set up the Wikimedia Foundation (http://wikimediafoundation.org/wiki/Support_Wikipedia/en) to help keep the website running. Donations can also often be collected to help with large one off running costs. For example, the site www.twcenter.net is a fan site for the Total War collection of games. In June 2010 the site started having access problems due to only having one server. The people who run the site set up a donation appeal and raised enough money for a second server, thus helping the site to keep going. Fans gladly paid in order to maintain access to the resource.
This clearly shows that donations are usually most appropriate for sites that are not run for profit. However, they can also be used effectively by sites that are run by internet marketers for profit making purposes. This can be achieved in one of two ways. Firstly, the owner of the site can ask for donations towards the running costs of the site, including the cost of servers, hosting and other services. The owner can then use advertising to make profit on top of the regular donations. Secondly, the owner can ask for donations to keep the site running and also to provide them with a salary in exchange for the time and effort they spend maintaining the site. This is actually the approach of the Wikimedia Foundation, which uses its donations to pay salaries to a staff of 35 people.
This approach may be preferable for people who wish to keep their site largely, or even entirely, free of advertising, thus improving the user experience. However, care must be taken to be entirely up front and honest with visitors, and tax authorities, about the purpose of the donations and what they are used for. Otherwise, not only will you violate the trust of your users, and hence probably lose them for good, but you risk a long and expensive tax investigation.
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