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11/08/2012 by
3356 views

How Do Social Media Sites Generate Revenue?

These days the Internet is all about making a profit; gone are the days of bulletin boards, free exchanging of information, scientists publishing their latest findings in an instant.

How Do Social Media Sites Generate Revenue How Do Social Media Sites Generate Revenue?

The World Wide Web is now the World Wide Wallet, harvesting cash at every turn and making billionaires faster than it goes through gigabytes. But how can social-based businesses like Facebook, Twitter and Badoo generate any cash when they don’t charge subscription fees?

I am a low-income social media addict who can barely afford to eat let alone pay for digital interaction, so I made it my duty to investigate how Mark Zuckerberg keeps himself in designer hoodies.

Most online enterprises are no different to traditional businesses; they make their money by convincing the user to hand over their hard-earned wages in exchange for goods and services. So eBay and Amazon have got it covered by charging commission on every product they sell, but when they give away their core functionality for free how do social networks even pay their running costs?

Of late, there has been an enormous surge in social gaming with phenomena like CityVille and Angry Birds occupying the spare time of working people across the globe, and with it has come the craze for ‘virtual currency’.

These digital dollars allow you to exchange real money for the on-line counterpart (often known simply as ‘credits’) which can in turn be spent on extended functionality, extra levels and nifty accessories for your avatar.

Although the world is increasingly becoming full of gamers, happy to swap their precious savings for dragon saddles and magic swords in World Of Warcraft, there is a powerful demographic who want to use social media to boost their actual social life and are willing to pay for the privilege.

Badoo is a new social networking site that integrates aspects of on-line dating with the more traditional facets of social media and has proven massively popular in Latin America and Southern Europe.

Unlike most dating sites it does not charge a subscription fee, giving the user full access free of charge, but it still manages to be profitable. “How – I hear you ask – does it achieve this near impossible task?” The answer is, Badoo knows its audience.

Online dating e1343739451739 How Do Social Media Sites Generate Revenue?

Any user who registers with what is essentially a free dating site is likely to meet two personal criteria; they are lonely, and they want to be found by other lonely people. The simple solution to this double-edged sword is to charge them for popularity. You pay $1 to rise to the top of the local listings, and every user searching in your area is going to see your pretty face beaming back at them.

However, as 50,000 people a day are joining the site it doesn’t take long to plummet back down to the bottom so the user keeps pumping money in and, before they know it, they’re hooked. It’s like a slot machine, except you have a vague chance of having sex rather than a vague chance of winning money.

So we know that even when they are offered ground-breaking functionality for absolutely free, most users of social media will still part with their money if you give them the opportunity. But this doesn’t answer my conundrum; as a user with no expendable income after food, accommodation and beer money how are they making money from me?

Everyone reading this article will have seen on-line advertising – in fact there is probably some framing this text you’re reading  – and may have noticed that certain ads ‘chase’ you around, particularly if you have been curious about on-line dating in the last 30 days.

Targeted advertising is nothing new. TV commercials have always been strategically placed in the right programs, and Google will only show you adverts which are relevant to what you’re searching, but social media has brought a new level of detail.

Targeted advertising e1343739228333 How Do Social Media Sites Generate Revenue?

Sites like Facebook encourage users to share as much information as they can with their on-line friends such as age, hobbies, interests and occupation in order to have a better experience on the site, but it wasn’t long before canny marketers caught on that they could repeatedly hit their exact target demographic by advertising on these networks.

Hyper-targeted advertising is where most social media sites make the majority of their money, exchanging our information to third party companies so that said companies can peddle their specific wares to exactly the market that buys them.

A mere seven or eight years later, and Facebook is valued at $100billion because of its sheer advertising clout. It doesn’t cost you or I a penny, or at least not directly, but when I finally log off and head to the mall to buy a new sweater, I know which one I want to purchase. And I think that, somewhere deep down, so does Mark Zuckerberg.

 

Zac Colbert has worked in social media and search marketing for five years, collaborating and consulting with major brands to enhance their online activities across a diverse range of sectors from online dating to health and fitness.

 

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Comments (3)

  • Igor Beuker 12/08/2012, 12:26

    Hi Zac

    Like the insights shares, thanks!

    One question: Do you think that online enterprises are no different to traditional businesses in other ways?

    I find many internet companies refreshing in their approach because they do not seem to suffer from “legacy” …

    That legacy often seems to be in the way at traditional businesses that tend to think from the past and in linear ways?

    Often seems like internet companies have a different menatlity and DNA?

    Curious how you experience this?

    Cheers

     
  • Petar Tchavdarov 16/08/2012, 15:04

    You make a good point Zac and we as users should have no problem with how the marketeers operate. After all it is our choice whether we want to share personal details or not.

    I reckon the bigger problem is the manipulative results from marketing campaigns. We have launched an online socks shop (at http://www.thesocks.com if you want to check it out) and started a facebook campaign to boost our popularity in social media. What struck us is the huge percentage of ghost and accounts that liked our page. Those accounts carry no value for us and it is like being ripped of your money just to see some “effect”. Moreover I think this problem is going to worsen in the future unless the large social media sites do something drastic about it. What do you think about this?

     
    • Igor Beuker 16/08/2012, 18:42

      Hi Petar

      Thanks for sharing. And you might be right: Facebook might have 83 million double + fake accounts out of 900 million, which is close to 10%.

      And FB will probably take action!

      We often forget other social and interest networks where people sahre ie their passion for running, fashion, football or the many others…

      Blogs, forums, social bookmark sites and other social and interest graph sites might help you to earn attention for the socks…

      Cheers

      Igor