Social networking is a daily activity for most of us. Anyone paying attention knows that sites like Facebook and Twitter have hundreds of millions of users and are extremely popular. But one thing I think we all forget from time to time is that these social networking sites are businesses. They do have employees and they do have costs. So I ask again, how do social networks make money?
The short answer is that they don’t, not on their own at least – at first. There are a few different ways social networking sites earn money, with more on the horizon. This article aims at uncovering a few of these methods and answering the questions that many of us are asking.
Venture Capital
First things first, most (if not all) social networks start with funding from venture capitalists. Investors are willing to take a risk on a company if they think it can be profitable in the future, so they invest early and hope for a huge payoff down the road.
Facebook is a great example of this. We already know how Facebook originated and how it works, but how does it make money? It all started with venture capital (VC).
The same goes with Twitter. Twitter and Facebook have each raised several million dollars in venture capital. The goal is to either monetize the company or sell it to a large corporation for an even bigger profit. Monetizing can prove difficult, which leads me to my next revenue stream.
Advertising & E-Commerce
Advertising is what most people would consider the number one way that social networks make money. After all, they have millions of users. That’s millions of eyeballs wandering around their website. Why wouldn’t advertisers want to get in on those views?
It’s true. The most common way for websites to generate revenue is to allow companies to advertise on the site. Web advertising is still an emerging market. Because of the millions of users on a social networking site, advertisers might be willing to pay more for an ad on a social network.
Twitter recently had their developer conference called Chirp. At the conference, they discussed various ways to monetize the website, most notably by harnessing advertising power.
Their thinking is that since users already use the site to get product recommendations and companies already use it to promote their products, customers may want to buy products directly from Twitter through e-commerce. We’ll see how their plans pan out in the upcoming months.
Offering Premium Options
While some social networks are completely free, others might offer a premium option to its users in an attempt to earn some money. LinkedIn, for example, has a premium package for job seekers. All of your networking options are free with LinkedIn, but if you want special privileges you have to sign up for one of their premium options.
An interesting example that took place recently was Ning. Although Ning has millions of users, they recently made the announcement to suspend their free services and concentrate solely on their premium model. They also were forced to cut several jobs. This shows just how difficult it is to monetize social networking (for now).
For sites that incorporate applications and services into the community, a developer fee can help generate revenue as well.
Creative Products & Promotions
Because of the difficulty of monetizing a social network, websites are forced to come up with creative ways to earn revenue. The best example of this is Facebook Gifts.
Facebook Gifts allows users to send virtual (as in not real) gifts to their friends that appear on the recipient’s profile. The cost of a gift is $1.00 and you can add a personalized message to it. Genius.
What’s In Store For The Future?
So aside from the common ways of earning money, I thought I would get into what I’m sure we’ll be seeing a lot of in the near future. Since no one (even me) can predict the future, we do not know what creative and ingenious ideas/technologies will come to fruition regarding social networks.
What I can tell you is that a lot of what is created will come from an invaluable resource that social networks possess: our data.
Monetizing Our Data
“Data is just as likely to be as big a piece of the business equation as advertising. Facebook, LinkedIn, MySpace and Twitter already possess billions of pieces of useful data that can infer so much about what’s happening – and what’s going to happen – in consumer society.” ~ Forbes
The data that social networks have accumulated is potentially very valuable. By aggregating this relationship data and making it anonymous, communities can find third-parties willing to pay for it.
It will be important that the sold information doesn’t invade anyone’s privacy, but that’s an entirely different issue. So long as the data contains our wants, needs, likes, dislikes, and interests, its value cannot yet be measured. The sky is the limit!
Conclusion
I hope this gives you a sense of where social networks are and where they’re going. There is no doubt in my mind that with the adoption of upcoming technologies (like geo-location) social networks are going to be even more attached to our daily activities and routines. There is a lot of money to be made, which I think venture capitalists and entrepreneurs realize.
What is your take on all this? I’d love to hear your thoughts in the comments section below!
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