In the past few decades, Facebook has emerged to be one of the most cherished social media networking platforms and applications all over the world. It has shown a tremendous 1.13 billion growth of daily active users. But the real question is how, despite so many controversies in its way, Facebook maintains to be at the top and that too with an increase in revenue each year. Facebook is used by billions of people regularly. That’s more than any TV channel in any country can offer. Advertising is an industry that’s measured in the trillions; why should it be surprising that a what is the Facebook business model that can bring in tens of billions of dollars a year from advertising?
I mean, it’s not easy. It requires substantial technology and many people to operate. It’s a major undertaking. But the Facebook business model is as simple as they come: when you have the attention of billions of people, many, many advertisers around the world are happy to pay you to run ads and promote their business.
I like to call the Facebook business model a hidden revenue generation model. In short, most Facebook users don’t even realize they’re getting sold advertising – as the primary revenue stream of Facebook – via the newsfeed.
Facebook has been able to engineer such a smart system of tracing users’ preferences that it can make tons of money from marketers and businesses willing to capture users’ attention via the newsfeed.
Products And Services Offered By Facebook
So, the Facebook business model which is used is pretty diversified, and there is a pretty ambitious and achieving strategy that is used by the company for sure. In order to know more and more about the Facebook business model, one has to have an idea of the important services which are provided by the company.
The Facebook Products include Facebook (including the Facebook mobile app and in-app browser), Messenger, Instagram (including apps like Direct and Boomerang), Portal-branded devices, Bonfire, Facebook Mentions, Spark AR Studio, Audience Network, NPE Team apps and any other features, apps, technologies, software, products, or services offered by Facebook Inc. or Facebook Ireland Limited under our Data Policy. The Facebook Products also include Facebook Business Tools, which are tools used by website owners and publishers, app developers, business partners (including advertisers) and their customers to support business services and exchange information with Facebook, such as social plugins (like the “Like” or “Share” button) and our SDKs and APIs.
Facebook Products does not include some Facebook-offered products or services that have their own separate privacy policies and terms of service – such as Workplace, Free Basics, and Messenger Kids
As mentioned above, Facebook is a company that owns several other companies and e-commerce stores on the Internet. Applications such as Instagram and WhatsApp are also a part of the Facebook Company. So, we can say this without a doubt that there are many different services that are provided by the company of Facebook.
For the people to have an idea about the entire Facebook business model that it uses, it is really important for them to know all the services that are provided by the Facebook Company and the other companies that are owned by the Facebook company.
Hence, we are going to mention it here so that people can have a better understanding of the concept in the best way.
1. Customers Of Facebook
- Users – Facebook’s customers mostly comprise its users. Users who wish to communicate with different people and interact with those in the outside world. Facebook is now its own marketplace where users can buy and sell a property like clothes and jewelry and even fundraise for their respective causes.
- Advertisers And Marketers – Brands and advertisers also form a part of its customer base that earns revenue for the company by placing offers and promotional ads.
- Developers – The site also has its own App and Game development platform where users can play while the game developers like Zynga and Facebook both benefits.
You will find more infographics at Statista
2. Value Proposition Of Facebook
- Global Connectivity – Facebook has made it its mission to spread a free medium of communication and connectivity with people across the world regardless of their nationality, religion, culture or background.
- Sharing Of Ideas: – It is a platform where different people can interact with each other and expose themselves to different cultures, experiences, and ideas.
- Global Communication – Many popular critics have noted the contribution of Facebook in enhancing common understandings and pioneering efforts in the globalization movement.
- Brand Publishing – It is a platform where you can showcase your talents as well as play games whenever you want.
- Easy Accessibility – There is no time limit where its network is concerned. Whatever you wish to search will be delivered in your domain.
- Business Expansion (Marketplace) – It has also become a platform to utilize your business where you can sponsor, sell or buy from either your own company or any other company.
- Virtual Reality – With the acquisition of Oculus, Facebook is trying its hand in the field of virtual reality hardware.
- Payment Infrastructure – Users can purchase digital goods or applications from developers using Facebook payment services.
3. Channels Of Facebook
- Internet – The first prerequisite is the Internet for its service; Facebook operates through the Internet via Laptops, Computers, Tablets or Smartphones.
- Website & Mobile Apps– Then, it makes its usage of its website and mobile app to reach more users. Through its site, Facebook allows advertisers to market their products. Many public figures and celebrities have also contributed to its channeling efforts.
- Third-Party Developer Tools And APIs – These are used by developers for channeling purposes as well. Other partnerships assist in these purposes in their own distinct ways depending on the agreement.
4. Customer Relationships Of Facebook
- Self Service Platform – Facebook’s network and site are user-friendly and easily accessible for its users. It assists new users through its instructions to form their own accounts and identities. The users gradually get the hang of it and realize how easy it can be utilized.
- Self-Taught Site – It is basically a self-learning site. You can expand your online visibility by finding more friends through your new profile owing to Facebook’s community-building applications.
- Global Salesforce – Facebook has an extensive global sales organization that works directly with Advertising agencies and ad resellers. Sales work to attract, retain and support advertisers.
5. Key Partners Of Facebook
- Content Creator – Key Content Partners such as Movies, TV Shows, Gaming, Music and News articles.
- Third-Party – Facebook’s platform continues to create new partners for it as it grows. Mobile operating system developers (iOS, Android), credit card companies (Visa, PayPal), handset manufacturers (Apple, Samsung), and browser developers (Safari, Chrome, Firefox) have collaborated with Facebook.
6. Key Activities Of Facebook
- Platform Development & Maintenance – Facebook is a platform that produces a myriad of activities. One of them being its web development alongside App Development and game development.
- Data Maintenance And Security – Invest in user data security and privacy.
- Establish Partnership & Develop New Offer – It offers other activities like projects, marketing, software development and other forms of innovation that it has been duly credited for.
- Strategic Acquisition – such as Instagram, WhatsApp, Oculus
- Maintain Government Regulations – complying with laws in different countries is essential for Facebook operations.
- Hire & Retain Talent
- Sales, Marketing And Operations
7. Key Resources Of Facebook
- Platform – Facebook utilizes its platform as its primary resource to access more users and advertisers. The more users access and log in to its site the more subsidiaries it receives.
- Network – Facebook’s network has provided limitless communication opportunities for its users despite their background.
- Technology Talent – Facebook takes immense pride in its technology and pool of talented employees. It was able to hire and retain. Thanks to its brand value.
8. Cost Structure of Facebook
- Platform – The majority of the costs incurred by Facebook are directed in its platform that amasses millions of users worldwide.
- Data Maintenance – Facebook incurs considerable costs from its Data Maintenance owing to how it manages, stores and protects its data, including the cost of data centers maintenance, equipment purchases, and upgrades.
- Content Acquisition Cost – Facebook license and pay to content producers to increase user engagement.
- Research and Development– Facebook focuses much of its time on the growth of its platform which demands costly investments.
- Marketing & Advertising– Facebook’s marketing strategy revolves around the audience and how it can expand that base. This tends to cost them exponentially.
- Customer Service – Facebook values the feedback of its customers. It invests substantially in providing its services to customers who are new or require assistance in managing their accounts.
Facebook Annual Report
At a high level, according to Facebook’s 2018 annual report, here is a breakdown of its cost:
- Cost Of Revenue – Operations expense, Datacenter, traffic and content acquisition cost, partner payment, and credit processing fees, etc.
- General & Administrative Cost – Employee compensation and salaries, office maintenance, legal, HR, finance and administrative expenses.
9. Revenue Stream Of Facebook
Let’s see how Facebook makes money?
1. Ad Revenue
The most vital money-making system for Facebook is in its advertising program. Most of its revenue (99%) is generated from advertising alone. It has always supported itself by its ads and will most definitely continue down this path.
Many have begun to spread conspiracy theories that Facebook will someday begin charging its users for utilizing or accessing their site. But these have been dismissed as mere rumors and fake news.
2. Self-Serve Advertising
- With Facebook’s self-serve platform for advertising, you simply have to seek out Facebook’s “Following” page and create your own campaign of advertising.
- These advertisements can be shown on sidebars such as events, groups, profile pages, and other applications on Facebook.
- Facebook uses its advertising strictly for a target audience, which is diverse according to age, gender, and relationship lines.
- It also relies heavily on restaurants, doctors, lawyers, and many small businesses or professionals to utilize its self-service advertising to generate its revenue.
3. Engagement Ads
- Apart from their self-serve advertisements, Facebook claims additional revenue from their “Engagement Ads” as well.
- These engagement ads are placed on Facebook’s homepage and are considered as key solutions for large advertising brands.
- All a user has to do is log in, and he can interact with some of these ads on the right side of the site’s homepage.
- Facebook has been working to increase its recruitment of brand advertisers.
- Some of the work has been created in the form of the Brand Lift. This product encourages large brands to test their advertising campaigns in terms of their effectiveness.
- Through this, more advertisers can utilize the product and adopt Facebook as their main campaigner.
4. Payment Revenue
It’s the fees that Facebook receives from the developer community or wholesalers for utilizing Facebook’s payment infrastructure. Facebook charges a fee for any business transaction on its platform, whether it be :
- Marketplace featured deals
- Sale of digital products like Zynga poker chips,
- Sale of apps from developers,
- Money transfer to friends,
- Fund Raiser’s transaction fees etc.
5. Sale Of Oculus
Facebook sells “Oculus” Virtual Reality (VR) products and makes a small portion of revenue from its sale.
Facebook and YouTube both rely on advertisers for their primary source of revenue, but Facebook has some Distinct Advantages:
- Targeting: Facebook’s big advantage for advertisers is the ability to target specific audiences, not just based on demographics, but their actual likes and hobbies, actual behaviors, past buying behaviors, as well as their friends and people that are similar. This means less of your ad spend is wasted on a shotgun approach, and you’re more likely to pay attention to an ad (and click through) if it’s really relevant to you. This advantage means Facebook can charge more for ads.
- Preference: People tend to stay on Facebook and view shared videos from their friends on Facebook, instead of jumping to YouTube. You may not realize it, but people watch 3 billion videos a day on Facebook and it receives two-thirds the number of video views of YouTube – a predicted two trillion in 2015 compared to YouTube’s 3 trillion, according to research by Ampere Analysis. Their research also shows that views are growing at a significantly faster rate on Facebook, up by 309% between Q3 2014 and Q1 2015, versus growth of 7.7% on YouTube.
- Frequency: People check Facebook several times a day, increasing the number of times they see an ad. We may not think we pay attention to ads, but we process the information even when skipping an ad. People may spend as much time on YouTube, but they are skipping over the ads and tuning them out. If you’re watching a music video, an advertiser can’t tell what your buying preferences are. Signing in with your Google account and tracking cookies help to target somewhat, but Facebook has a clear advantage here.
- Social Sharing: Advertisers know that you are more likely to buy a product recommended by a friend. Having someone like your product page, share the page, or tell their friends about a product is a huge boost for companies – even small local firms like my neighborhood pizza shop. It’s much easier to just type out a post on your phone or hit a like button than to create a YouTube video. Viral video ads on YouTube are great when they happen, but they are harder to create than most people realize.
Critical Things That A Business Needs To Have Before They Can Generate Advertising Revenue.
1. An Audience Worth Advertising To
- If you were to make a website where only children visited (not their parents) no one would want to advertise. Kids don’t have any money. Spending money on an audience that won’t take action is a poor use of advertising dollars
- Facebook’s audience is accustomed to viewing feeds and stories. Their ads are “native” which helps people engage. Ads that are clearly “ads” are easy for people to tune out. Facebook can charge more because of this high response rate.
2. A Platform That Has Room For Ads
- Facebook has over a BILLION USERS. If you think of just 1 ad being shown to each user you can see how much money they can make.
- Users spend A TON of time on the site. Remember how we just thought about if every user got shown 1 ad. What if that user actually saw 2 or 3 or 20 ads a day? What if that user gets on every day? Those ads add up.
3. Incredible Targeting With Data
- Advertisers want to spend their money effectively. They want as many ads as possible in front of the right people. Facebook has an incredible amount of data for advertisers.
- Advertisers can advertise to people that like to shop online/ and are interested in cooking/ and that are women/ between the ages of 18 and 35. It’s almost impossible to get to that level of targeting on any other platform.
At this point in time, Facebook has a market capitalization of about 435 Billion dollars. If you take a look at the revenue and net income, they have been growing. Facebook has no debt whatsoever. With such solid financials, it certainly looks like the Facebook business model is great.