Facebook business model – a complete breakdown of how the social media giant makes money.
Mark Zuckerberg’s net worth has been on the decline for a while. And the shares of Facebook (Meta) has also been on a free fall. In fact recently the company announced plan to downsize by as much as 11,000 employees. All these happening within almost the same time has led some persons in some quarters to question the business model of Facebook.
But we all know what Facebook has done as well as how far they have come. You don’t amass over 2.9 billion users by doing something that is not working. And that is no matter how strange or foolish it may look to observers.
So today I will want us to take another look at this same business model that has helped Facebook become the number one social media platform in the world. But we will equally see if it is still relevant in a generation where the competition has become more fierce.
What is Facebook?
Facebook is an online social media and social networking platform that enables users to share information and photos and keep in touch with family, friends and associates. The platform is owned by American company Meta Platforms Inc. It was founded in the year 2004 by one of the now most famous tech entrepreneur of the 21st century – Mark Zuckerberg. Despite having a gigiantic number of users and been the clear market leader the platform remains free to all users. Yet, it is not a social enterprise but a complete business with investors expecting dividend at the end of every business year.
So you would want to ask, ‘how then does the company make money?’ That will form the crux of our discussion on this blog post. But before we proceed, it is important to gain a complete understanding of how the platform works.
Facebook Business Model – How it Works
Below are the most popular features and functionalities of Facebook:
1. Connecting with people
The first and perhaps the most basic feature of Facebook is that of connecting with people you know. The connection gives birth to what is known as ‘Facebook friends’. But the amazing thing about Facebook is that it gives you variety of ways of doing this. You can find people to become “friends” with on Facebook based on where you live (or lived), where you go (or went) to school, where you work (or worked), or even who else you are friends with. Even some of your frequent email contacts might be on Facebook already!
In fact recently I discovered that each time I go out in a networking events and I get some new contacts, once I store the number in my phone, on my next login Facebook will be suggesting that name as a friend to me.
2. Updates from top brands
Facebook also allows you to follow posts from your favourite corporate and social icons. These might not be people you have direct access to or people that can become your ‘friends’. But you can still get all their updates by ‘following’ them on Facebook.
3. Share your moments or discoveries both through text and media
This is another popular feature of Facebook. Everyone is his own news channel on Facebook. In fact Facebook wakes you up every morning with the question ‘What is on your mind?’
So you can let your Facebook “friends” know what you’re up to through text based posts, pictures or videos.
4. Engaging Conversation Through “likes” and comments
When you see updates from your friends or the people or brands that you follow, you can either scroll and pass or engage the post. And there are three levels of engagement:
Each of these levels of engagement are ways of keeping the conversation going and interesting.
5. Direct Messaging
Whether it is picture or text based message it is possible you want to have a direct one-on-one communication with someone. Facebook also provides that avenue. So it has a chat feature too.
6. Video call or chat
But your direct communication with friends is not only limited to text or pictures. You can actually do a live video call and have a face-to-face video conversation on Facebook. This will be a real-time conversation just like with a Skype or even Zoom.
7. Create or Join Groups with similar interests
You can join “groups” on Facebook that are focused on a particular activity or theme. Then, you can post content and discussions that can be seen and contributed to by all group members. Some groups are open to the public, while others require you to be invited in order to join and see them.
Anyone also have the right to initiate a new group and let others join.
8. Remote work tools and groups
Facebook added remote work tools on its app to facilitate collaboration between colleagues and freelancers. It includes Workplace Rooms that offer more features for professional workers to collaborate on the network. As of May 2020, Work Groups had more than 20 million active monthly users and 170,000 active groups.
Facebook also expanded its platform with new tools that enable users to live-stream sessions and events like wedding or birthday for friends and family to attend. The live-streaming feature is also used by professionals for remote work.
These are just some of the basic features that Facebook offers. But there are others, like the ability to go live, organize an event, share 24 hours status etc.
But our interest today is the goal of all of these – how it will lead to Facebook making money, especially as all of the services listed above remains free.
So how does these features work to Facebook advantage?
So here is the thing, all the features listed above are they to keep users glued to the app for as long as possible. And through that Facebook displays different ads from different companies that pay for them.
But it is not just standard, random ads that Facebook shows to its users. Rather they are targeted ads that adds real value not just to our social engagements but also to our lives in general. Facebook knows a lot about us thanks to our behavior on Facebook’s family of apps that includes Facebook, Instagram, WhatsApp, and Facebook Messenger. These data and their value to the company probably serves as enough compensation for Facebook to keep offering its service to users for free.
For example, Facebook has data about whom we communicate with, what content we consume and react to, and even what pages and apps we visit outside Facebook apps. These are just a few examples, and there are many other data points Facebook collects.
Based on these, Facebook’s algorithms can estimate your personal profile and categorize you based on impressively granular characteristics that their algorithms can deduce. And they can do that even if you don’t specifically share it yourself, thanks to the predictive power of machine learning algorithms they use.
Facebook equally knows our age, religion, ethnicity, interests, political opinions, relationship status, and much more.
Of course, these predictions are not 100% accurate but are accurate enough to be very valuable for advertisers for precise ad targeting.
Facebook Business Model – Market (Customer) Segments
They are the biggest customer segment of Facebook and are responsible for almost everything that happens. They are all the people who have their profiles in the network and use them to interact and communicate with friends and other people with similar interests around the globe.
While this customer segment is particularly important is that unlike in Google Business Model they are the creators and at the same time the consumers of every single content uploaded on Facebook. But guess what? As with every hidden business model they don’t pay Facebook anything for all these. They enjoy all the services completely free. However, they are the basis that makes Facebook interesting for the ones who do pay.
Businesses and advertisers
This is the second customer segment in the Facebook Business Model. And this is as important to Facebook as the users – perhaps more important. In fact, Facebook don’t joke with this particular customer segment because they are directly responsible for the revenue that Facebook generates. This segment encompasses all the brands and businesses that advertise on the social network. They pay to have ads for their products and services on the platform, which, from its side, offers a more qualified audience.
Due to the information that Facebook collects from its users, the company is able to target advertisements on its platform, allowing brands and businesses to have their ads viewed by its target audience. Anyway, although these are the revenue providers, they will only keep their interest as long as the non-paying user base is wide and qualified.
Facebook Business Model – Value Prepositions
Without any argument Facebook is packed with so much value. Yes, it is only excess value that can bring nearly 3 billion people to the same app every single month. Some of us visit the app at least once every day.
But in our usual way, I prefer to look at the value proposition from the various customer segments. And this is natural because the various customer will perceive or define value in a different light.
That said, let’s divide the value proposition by the two major customer segments:
Facebook Business Model – Value Proposition for users
- It offers users the opportunity to keep in touch with family and friends, via text and picture posting.
- It creates opportunity for interactions and engagements through comments and direct messages.
- Enough entertainment is made available on Facebook entertainment
- Facebook is a news channel of its own – so with it you can be well informed
- It offers a powerful learning platform to users
- This may not be obvious but many people use Facebook as a cloud storage to preserve memories all for free
- There is no limit to the information one can share on Facebook
- Facebook has gone beyond just entertainment, many people now promote their businesses on their personal timelines and make sales
Facebook Business Model – Value Proposition for advertisers
- Access to nearly 3 billion potential customers across the globe – how many other platforms can offer that?
- It offers the opportunity and possibility of a well targeted campaigns, focused on the particular target audience thereby maximizing advertising budget
- By achieving greater penetration in its main audience, companies also get greater engagement in their customer segment of interest.
- No matter how small your advertising budget may be, Facebook has a provision for you
- The tools to advertise on Facebook are quite simple, in the best “do it yourself” style, which reduces the need to hire someone to develop their own advertising content.
Facebook Business Model – How They Make Money
There are two ways Facebook make money; Advertisement and sale of virtual reality products.
We have said before that users who are the primary customer segments in the Facebook Business Model don’t pay. Rather, the company earns revenue primarily by selling advertising space on its platform. But how does this work also?
The cost of advertising varies and is based on an ad auction system. Marketers set a budget for advertising and Facebook counters with how many impressions the company can get for their proposed budget. This means that no matter how little your budget may be you can advertise on Facebook – however, the amount will determine the reach and impression your ad gets.
The bulk of Facebook revenue, almost 98% comes from advertising.
From Sale of Oculus Virtual Reality Products
Though advertising accounts for the bulk of Facebook revenue, yet a very small portion still comes from the sale of its virtual reality products – Oculus. This accounts for between 1% to 2% of the entire Facebook revenue, with advertising accounting for the rest.
Facebook remains the clear market leader in the social media world. However the challenge from competitors is becoming real. In fact, one of the major reasons Mark Zuckerberg net worth has been going down for a while is dwindling revenue as a result of increased competition from brands like TikTok.
So here are Facebook’s major competitors:
- Snapchat: This is a photo and video sharing app released in 2011, with 363 million active daily users. It is very popular among kids under 16 because the content disappears in seconds. India is the country with the highest number of Snapchat users.
- LinkedIn: This professional network was launched in 2003. It aims at linking recruiters, employers, and potential applicants. The site is free to use, but it has some premium features, for its over 875 million registered users;
- Twitter: Free microblogging service founded in 2006. Its approximately 450 million members can post short texts called tweets’ The threat of Twitter to Facebook is even becoming more real now that Elon Musk has bought it.
- YouTube: The video-sharing platform allows users to upload, view, and share videos. It was founded in 2005 and accounts for 2.1 billion regular users, who watch more than one billion hours of videos each day;
- Pinterest: This social networking site is for saving and discovering creative ideas. It was created in 2009, and it has around 480 million active users nowadays;
- TikTok: Perhaps the greatest threat or biggest competitor that Facebook has to worry about as long as its business model is concerned is TikTok. It is a social media app founded in 2012 for creating and sharing videos or for live broadcasting. Despite been relatively new, yet it has grown massively and now have over 1.4 billion active users currently.
Conclusion on Facebook Business Model
Facebook business model is an advertising or hidden business model where the primary users don’t pay for the service but they play significant role in the interest of those who pay. As a company Facebook makes about 99% of its revenue from advertising companies who pay to show their products and services to nearly 3 billion users on Facebook.
Two things that makes Facebook the platform of interest for advertisers are:
The massive user base – nearly 3 billion users
The almost 100% accuracy in targeted ads.
However, there are a lot of competition that Facebook is receiving from other platforms like TikTok and to remain the market leader that it has been Facebook must constantly review its business model especially as it affects the value proposition.