Facebook Inc. is an American multinational social networking company started in 2004 and headquartered in California. Mark Zuckerberg, among four others, a student of Harvard University, began a small social networking platform for college students. At the end of 2005, Facebook expanded to 21 universities. In 2006, Facebook opened for everyone out there and soon became a sensation all over the world.
Facebook is a platform where users make an account and connect with people and friends worldwide—allowing people of different countries to share content, pictures, and even thoughts. So, how does a free platform of Facebook grow its revenue and become one of the most profitable companies? Facebook has become more than just a social networking site. To build a brand and advertise it to people, motivational and life advice, make a meaningful friendship to people overseas, and find a job or find a flatmate, Facebook has tremendous benefits and proved beneficial from teens to old age people.
If today’s revenue of Facebook is studied, around 98% comes from advertising, and the rest from miscellaneous things like payments and in-app purchases. Making overall revenue to be about 86 billion dollars. Facebook has almost 2.85 billion users connected worldwide, making it a perfect space for advertising without physical infrastructure. Businesses can easily connect with their customers and future target audience about their product sales, offers, discounts, and much more.
Business Model of Facebook
Though Facebook Inc. has its rivals like Apple, Twitter, Linked In, Snapchat, and many more, Facebook has stood still in the market as it has dominant users. The foremost revenue-generating strategy is from the advertising business and the rest of it from other products. According to Mark Zuckerberg, CEO of Facebook, one of its versions will always be accessible no matter what, as apart from money-making, it is the mission of Facebook to connect everyone around the world.
To that, Facebook needs to offer the service so that everyone can afford it. Providing this benefits people as well as Facebook to add many more users. Using this strategy, Facebook will have the attention of the people of the world to their platform, which they provide the companies who want to advertise using Facebook. Advertisers pay the price to show their product on Facebook, which means Facebook users are just a targeted audience. The customers of Facebook are the companies who want to use the platform for advertising.
Despite the data breach and privacy issues, people have not lost their trust in it, and in this covid-19 pandemic, their revenue increased drastically. The scenario was also beneficial for Facebook on Wall Street, as the share price jumped almost 40% in one year. Even Facebook-owned other social networking platforms like WhatsApp, Messenger, and Instagram work on the same model. The vision of Mark Zuckerberg is not only limited to the social media platforms but enters into the business of e-commerce, artificial intelligence, and education.
What Factors Help Facebook Make Money
As more and more people use Facebook, more advertisements will be seen and clicked by them, making more money on Facebook. But is the scenario so simple? The factors which drive the revenue from the advertisements are:
Users
For advertisers, the customer base is the users of Facebook. It is evident that the more users of Facebook, the more likely it is to reach the advertisement to the customer base. But, Facebook has differentiated the customer base based on geographies. So, the weight of users from the U.S is much more than the users of Africa or Asia, which means the customer base of the U.S affects the revenue by advertisements.
Time Spent
As Facebook has owned platforms like Messenger, Instagram, and Facebook itself, many users would be spending time using it. The more screen time users will have, the more time Facebook can flash the advertisements, making more revenues to the company.
Ads Per Hour
It is pretty clear that the more ads are shown on Facebook, the company will generate more revenue. But as Facebook flashes more ads on the screen, again and again, it will irritate the users, and this may lead to stop using Facebook and their owned platforms. The company should control the advertisement so that it won’t seem irritating. Also, as more ads are shown, the price per ad goes down drastically.
Price Per Ad
The price per ad is the price that advertisers pay to Facebook. No advertiser can come to Facebook and start using their platform for advertisements. The advertiser has to take part in the auction system, for which the advertiser with the highest bid is given the platform for the ad. The price per ad is the most volatile factor in the revenue-generating formula. Facebook itself can easily influence this price by controlling the aspect of Ads per hour.
Combining all the factors, the revenue is the product of all the elements. If one single factor varies, the revenue gets affected. This is the most simplified way to understand the revenue system of Facebook, the reality is much more complex, and many more factors come into consideration.
How Does Advertising Help Facebook Make Money?
It is evident that most of the business for Facebook comes from advertising, but how do they earn from the strategy? Companies use the platform of Facebook to publish or post their advertisements, for which companies pay a good amount of fees to Facebook. In return, Facebook provides space in news feeds and status. The cost of space offered is dependent on various factors like:
- Size required by the advertisement
- Period for which advertisement will be flashed
- Whether the advertisement is flashed at day or night?
Revenue Generation From Big Data
Big data are extensive data collected and analyzed by the companies computationally to reveal trends, which indirectly tells about human behavior and psychology. It is one of the hot topics for every organization, as every information is in the data only. It will help the companies identify new opportunities and optimize the organization to generate more profit. Amazon is one such company that has used big data technology tremendously and successfully identified many cost-cutting methods and new opportunities by studying human behavior.
Similarly, Facebook also uses the technology of big data immensely. Facebook, through its messenger application, WhatsApp and Instagram, knows much about its users. It is the data of its users which is most valuable, so to gain more and more data, the basic structure of Facebook has to be free. As the users agree to all the terms of the agreement while making their account, they give access to information like, which Facebook pages we visit, what content is viewed most, whom we communicate with, and much more.
A computerized algorithm uses this data, and with its help, Facebook can study the behavior and general character of its users. They know what food we like the most, which places we travel the most, religion, political interest, relationship status, and much more, just with the help of Big Data. As Facebook has such powerful information and platform, the advertisers see this as a perfect opportunity to spread their product worldwide. According to the Statista Research Department, the number of active advertisers using the Facebook platform to promote their product was around ten million. The Facebook feed gives more than 60% of the advertising revenue, and 30% comes from Instagram.
Other Revenue Generating Source
Though dependent on advertisements, such a giant has worked on various other products as well to generate more revenue. For a very long time, Facebook has entered the segment of artificial intelligence, virtual and augmented reality, and is working on it. The products of facebook which help them generate money are:
Facebook Marketplace
Facebook marketplace is a dedicated place to discover, buy and sell products. The marketplace is integrated into the ongoing Facebook platform so that no user has to install a different app to use it. Facebook has also monetized the marketplace, and now advertisements are also flashed on the marketplace page. The idea helps generate revenue for the company.
WhatsApp Business
Facebook launched its WhatsApp application for business, where small scale and large scale businesses build and maintain their profiles. This helps companies update their customers about offers, discounts, shipping confirmation, reminders, tickets, and bookings more efficiently.
More importantly, it is the WhatsApp Business API, from which Facebook makes its money. Application Programming Interface (API) is a medium or connection between various applications to perform specific tasks. WhatsApp API helps businesses send messages to their customers free for up to 24 hours but charges a separate fee for every message sent after 24 hours; this varies from country to country.
Facebook Paid Online Events
Facebook started paid online events to host their live shows or events and monetize the events. Hosts can set up the ticket fees and create their live events. The user has to sign Facebook’s terms of service and pay a fee to Facebook.
Facebook Oculus
Oculus is a brand of Facebook dedicated to virtual and augmented reality. The segment manufactures virtual reality headsets, also known as VRs. Moreover, it was Oculus through which Facebook was working on telepresence. The products such as Oculus Quest 2.0 all-in-one VR, headphones, controllers, VirtuClear Lens, and power adapters are offered by Facebook’s Oculus. Out of which, the cost of VR is around $299.99, which is lower than its competitors. This segment was booming in generating revenue of approximately 419 million dollars.
Facebook Payments
Facebook has many games and applications which require in-app purchases. One such game of Facebook where users made most of the payments was Farmville. From a single in-app purchase, they made a whopping revenue of around 419 million dollars.
Facebook Portal
Portal is another augmented reality segment of Facebook, where they make smart video communication devices. The users use these intelligent devices to communicate with the help of video chat. This small video and audio-enabled device cost around $199.
Who Brings More Money To Facebook?
Users as well as advertisers both bring business to Facebook, but in different ways. As per the CEO of Facebook, it will always be accessible to its users no matter what. Facebook has helped its users build such a solid network for people, making it harder for its users to stop using Facebook as advertisements play a significant role in generating revenue, so the advertisers will always be important to Facebook.
Advertisers and customers, both are incomplete without each other. And this Facebook was successful in making a strategy to benefit from their relationship. It makes the advertisers be the most important customers to Facebook. The model as well as further business decisions by the Facebook administration is done keeping the advertisers in mind.
Revenue From Interests
Facebook has such a diverse revenue-generating system already; the cash flow generated from these strategies is immense. Facebook, though it uses most of the revenue for its Research and Development, still a lot of cash is left in the depository. Facebook stores such cash in financial institutions like bonds and even in money market funds. The interest gained from the investment is so vast that it even surpasses all the revenues that Facebook earns.
Conclusion
Facebook is one of the most successful social networking companies generating millions of revenue from its business model. However, as Google is such a giant in the technology company, they are still diversifying their products; similarly, Facebook is also trying to diversify their products and earn from various segments. Still, as of now, the highest money-making is through Facebook advertisements.
Frequently Asked Questions
- Does Facebook sell data of users to make money?
No, Facebook never sells the data of its users to make money but uses that data to strategize new business opportunities through big data technology.
- What business is Facebook planning to step into the future?
Facebook is planning to step into many businesses, out of which the major one is e-commerce, dating websites, drones, and express Wi-Fi.
- How can users of Facebook make money from the platform?
Facebook and Instagram feature making a business account, where content can be monetized and users can earn.
