As I have studied email newsletter marketing further, and have learned about the concept of taking your time to develop a relationship with your readers, I have also begun to better understand the business models of several new media companies. Yesterday on the Facebook blog, Mark Zuckerberg announced that they have surpassed the 300 million user mark, and that they are now cash flow positive. In this story from Yahoo News, this cash flow positive metric does not include any cash from private investments, which means they are now proving their viability as a business model. For a long time there were criticisms that their business model would never reach this point, and that eventually it would all come crashing down around them. So what is their business model exactly? Are people really buying this many “gifts” for their friends?
A Look At The Facebook Layout
Taking a look at the Facebook home screen (I’ve removed personal information pertaining to my friends) you’ll notice that they actually do nothing that immediately makes them any money here. No advertisements whatsoever. Everything on this page is about making your connections within the site deeper. They want your online social life as it were, to be dominated by your Facebook interactions. The whole page is designed to get you clicking on links pertaining to your friends’ activities, the pictures and videos they post, and their status updates.
Advertising Placements
Further into the site we start seeing ads on the right hand side of the content. The same ad placement applies across most of the site, whether it is on profile pages, or photos/videos that you or your friends have posted on the site. You’ll notice in the image below that some of the ads are not in English, this is because I am currently in Denmark, and as a result I am being targeted as though I were living in Denmark.
Advertising Targeting
Advertising in a newspaper, or on a billboard we can get broad exposure, which is great for branding purposes (I suppose), but it’s not very effective at driving sales immediately. With Facebook and other social networking sites we have the ability to do some very specific targeting that traditional forms of media cannot. Let’s say for example that we ran an ecommerce store selling camping equipment and we wanted to drive more sales to our website. Using Facebook we can target people based on their geographic location, age, gender, and many more characteristics. In the picture below we have made a sample advertisement targeting people living in the United States, over the age of 21, who have listed “camping” as one of their interests. The result of this targeting is a pool of 1,725,280 Facebook users for us to target.
Advertising Pricing
After targeting our prospective customers, and receiving numbers as to how many there are on the network, we can get some approximate price quotes from Facebook. This is automated, and only an approximate. You will never pay more than your max bid, or max daily budget, but if people are clicking on your add more often then your per click cost will go down. You can also target based on number of exposures which is apparently a great way to keep your costs down if you know how to get your click thru rates up.
This model is quite similar to Google’s Adwords advertising service, but instead of targeting based on people’s search terms, you are targeting based on very specific demographics (including interests). In fact if you read up on Google’s development and their history it is strikingly similar to Facebook’s. They took quite some time to build up their Adwords service, and to get to the point where they are now. They are making money through long tail economics. Because it is so simple for them to make money on the narrowest of niche’s at essentially no extra cost, they can become a viable advertising tool for almost any business regardless of scale. What makes Google and Facebook so valuable is that they make other businesses lots of money, even though they don’t directly charge 99.99% of people who use their website and services. Give your users increasingly more reasons to stay on your site, and interact with the different elements within it, and you increase the lifetime value of each visitor/user/customer.