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Demystifying Facebook’s Revenue Stream

12 Dec

Just last week my roommates started referring to me as Mr. Facebook due to how I’m always popping up on their newsfeeds and uploading and tagging them in random pictures and posts. At first I became really defensive and retorted with:

“It’s not my fault I come up so often. Maybe if you had more than a hundred friends, we wouldn’t have this problem.”

That sounded really good at the time, but in retrospect, I think it really only strengthens their argument.

Now, I was trying to come up with specific times of when, thanks to Facebook, some of my past conversations took an awkward turn, but decided these awkward Facebook moments were funnier (last one’s pretty sad though):

But anyways, Facebook’s been coming up a lot and recently someone asked me how Facebook makes money, seeing as they don’t charge users for their accounts.

The answer’s pretty straightforward: ad space. Facebook, like most other websites in the green, makes its money through advertisements—especially ads tailored to each of our individual interests. If I went to my Facebook right now, on the right hand panel I would probably find an ad about upcoming 30 Seconds to Mars and Jay Sean concerts, Seinfeld apparel, online education, massage therapy degrees, and best of all, sites promising to link me with young, hot and single Persians. I just hit the refresh button and got some new crap about Kinect for XBOX 360, becoming a paid survey-taker, and racquetball shirts.

The craziest part of this isn’t how much money they make off of this (just fyi: a ridiculous $250-300 million in 2009 alone), but how there’s a button on the bottom of these ads, More Ads which then takes you to an Ad Board customized, once again, to your interests. At this point, I can’t really think of anything to say aside from “Brilliant bastards…”

But in all seriousness, how brilliant is this method of marketing? I know they’re not the first to implement it (Google AdSense), but I would argue that they’re the most effective. So many people (myself included) click the “like” option and suggest these ads to friends, making it an interactive experience. It’s scary how some of these ads actually seem to call out to me.

Not too long ago, a lot of angry people stirred up a ruckus over how pissed off/scared/whatever they were about Facebook collecting the information on their profiles to target them with such advertising. I see their point, but I kind of just want to ask these people why they would even create a page if they were concerned about this. Better yet, keep your page, but don’t add specifics to your profile, it’s not that hard. They might also want to think about how this keeps Facebook free and in top shape.

But I digress.

I went through some of the initial steps of creating my own ad. They’re very robust in how you can specify not only by gender, but pretty much by any information you may or may not include in your profile, such as relationship status, what you’re interested in, languages you might speak, education and workplaces, your past likes and interests, and your region.  The most appealing part of it all are the marketing metrics approximations they provide you with that change with each adjustment you make. For example, I chose to target the entirety of the United States to people who are age 18 or older, like soccer or indoor soccer, and work at Microsoft; the estimated reach for all of these specifications is 920. You can imagine how useful such feedback might be in helping you decide whether or not to change your choices or even invest in such a campaign at all.

One of the case studies Facebook provides you with covers how a company called CM Photographics generated approximately “$40,000 in revenue directly from a $600 advertising investment on Facebook. Of the Facebook users who were directed to CM Photographics’ website from the ads, 60% became qualified leads and actively expressed interest in more information.”

Naturally, there’s more to the process than just throwing money at Facebook and expecting immediate results. Yes, it’s a way to generate some buzz around your website/company but you’ve got to make sure your product or service is appealing enough to your target audience that they follow up. Impressive nonetheless.

Another interesting aspect of their revenue stream are the Facebook gifts you can purchase for others. Some of the money goes towards whichever outside companies might have created the gift (if not Facebook itself) but otherwise it stays in house. In 2009, they generated between $30-50 million based off of such gifts and other virtual goods.

In one report, Facebook is estimated to achieve over $1 billion in revenue for the 2010 year. According to another report, this would be doubling their 2009 revenue of $500 million which had grown from $300 million in 2008.

Now that we’ve established how powerful and smart the Facebook team and its associates are, why don’t we look into some ways that YOU can benefit from their success? The following was gathered from a slide show by Richard Krueger, the author of Facebook Marketing for Dummies:

1.       Sell products via Facebook. There’s a huge market out there.

2.       Develop an application. There are a lot of opportunities here, just refer to my first blog on mobile business apps. You don’t necessarily even have to develop it yourself, just come up with a creative idea and team up with someone who can make it a reality.

3.       Ad arbitraging. This is basically when you buy ad space and then sell the targeted traffic.

4.       Promote yourself, or according to Kreuger, “Become a Celebrity.” Create groups and pages for yourself, create newsletters, etc.

5.       Market research. `Nuff said.

6.       Become a Facebook Party Planner. Personally, I thought this one was kind of lame, but hey, who am I to judge?

7.       Position yourself as a Facebook Marketing Expert.

8.        Comment with your own ideas of how to make it big!

Regardless of whether you take advantage of all that Facebook has to offer or not, it’s definitely around to stay for at least a little while. In fact, Myspace recently just conceded defeat.

Anyways,

Happy Facebooking!

 
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Posted by on December 12, 2010 in Business/Technology

 

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