Today, the Web seems to be dominated by social networking sites. Every day, millions of people interact with their friends on Facebook, send out a tweet on Twitter, post a video in YouTube, upload their compositions in MySpace, or share photos in Flickr. Most of these sites allow people to create their accounts without spending a single cent. So, how do these sites make enough money to support millions of users without going bankrupt?
One way for them to generate income is through the investments from venture capitalists. Venture capitalists are investors who make a bet that the site they are investing in will become popular. That popularity will eventually find a way to monetize that success. Thus, an investor who enters the arena early can acquire a huge payoff in the future.
Venture capitalism was very popular between the dot-com bubble burst in 2000 and the economic recession in 2007. Large corporations bought promising Internet startup companies for millions of dollars. As the economic recession worsened, venture capitalism slowed down. Yes, there are still entities who are investing in promising companies, but they are now careful with their choices. However, venture capitalism has its own set of problems that emerge as time goes on. Investors need to find ways to raise more capital. A steady stream of revenue to inject capital into the company rarely exists.
Social networking sites eventually have to either find another way to finance their operation or persuade a larger company to buy the site. Since most social networking site’s founders want to maintain control over the site, most opted for the first choice: find a way to make money.
They found a solution by inviting companies to advertise on the site. The principle works like this: the more popular the website is, the more people will view it. For instance, Facebook alone has millions of active users. Having access to that resource is definitely advantageous for your company. Thus, you may be willing to pay Facebook for an advertisement so that it would be exposed to this vast market rather than publishing an ad on a less popular site.
Another way for social networking sites to generate money is to require users to pay a fee if they wish to access extra features. Most social networking sites avoid this strategy, however, there are several that has been able to use it very effectively. A good example is an online dating site wherein the service provider denies users key features unless members upgrade to a premium account. For instance, for a free account, you can browse for a potential match on a dating service; but if you want to send a message to someone you particularly like, you need to upgrade your account by paying a fee.
A social networking site can also generate revenue by introducing a fee if a developer wants to incorporate his own online applications the site’s community. For instance, Facebook allows developers to create applications and incorporate them on the site free of charge. However, Facebook has a discretionary verification program. By shelling out USD375, a developer can request Facebook to evaluate his submission. If the application passes the company’s standards, Facebook will list the application as “verified,” meaning it will be prominently featured over apps that have not been verified.
You may find this hard to believe, but Web advertising is a relatively new market. Experts in marketing are still thriving to find the best, most effective way to incorporate advertising into online experience without giving users a negative impact. As Web marketing matures, we will see other innovative business models that social networking sites formulate. Strategies such as paid premium accounts for businesses may surface.
Social networking sites are here to stay, and as long as there are people who use them, they will continue to generate income through a continuing process of identifying and implementing creative business models.