Monetizing Social Networks: The Four Dominant Business Models and How You Should Implement Them in 2010

The business models within the social media realm are much different than traditional businesses. In social networking, they’re ever-changing, backed by eye-opening revenue and have very little documentation.

Reason: as soon as someone sits down to outline ways social networks can be monetized, another model emerges, and another model ceases. For this reason, this piece will be routinely updated with new models and new feedback from your comments.

Below are the Four Primary Business Models in the social networking space that I’ve experienced–they primarily are concerned with Facebook Applications. There may be others, or extensions of these, or even ideas out there that have yet to be tested yet are profoundly viable. All additions are welcomed.

I. Display Ads:

This is your bread and butter business model. It centers on showing showing Display/Context Ads. The two major forms of this are CPC (cost per click) and CPA (cost per action or acquisition).

Example:

With the ad above, the user clicks the ad, they take a quiz, and usually they fill out their email address or phone number. The advertiser (IQ Quiz), will pay the Facebook developer (you) each time a user fills out their email address or phone number. Usually, there’s a middle man involved. The middle man is called an ad network.

These types of ads can pay out a CPM of $0.05 – $0.80 (*Depending on Country*)

Say you serve 1 million impressions of these per day, at a $0.20 CPM, you can expect to make $200 per day, or $6,000 a month.

II. Branding Certain Elements within an Application

This business model is rather new, and personally, my favorite. This model centers on branding a certain element within your application.

For instance, LivingSocial is an application where users can make a list of their favorite things. Big brands, like Porsche, may want to get in front of their audience and have users speak about their brand in a viral, social networking space. Therefore, Porsche will pay LivingSocial for each exposure to their audience. By exposure, I mean hitting the newsfeed of the user on Facebook:

I like to think of this model as a Cost Per Share (CPS).

Using the above example, let’s say you have 1 million impressions of a certain application. For each person that shares Porsche with their friends via Newsfeed, Porsche will pay $5 because these users are loyal and will argue why the Porsche is the best car via comments.

Of those 1 million daily impressions or exposures to the app, 0.01% (or 100) users are into Porsches and post their Porsche list to their news feed.

With 100 users sharing on their newsfeed per day, at a price of $5 CPS, your app will be making $500 per day, or $15,000 a month.

This is much better than the Banner Ad payouts of $6,000/month; additionally, the user experience isn’t as bland. By this, I mean, the user doesn’t feel like he or she is getting hammered with ads.

The only cons with using the CPS model is, (i) As of this past week, Facebook is hiding and disabling application news to be blasted on the home feed; thus, this business model could be dead in a couple weeks; (ii) second, the CPS model requires someone who’s creative and persistent on your team. Because social media is so new, and this model is so new, it’s much easier to setup a business model based on banner ads (all you do is sign up with an ad network and place the creative ad code on your site). With CPS models, you must identify specific elements within your application that are valuable, and you must then find big brands (like Coca Cola) to buy it. When you’re a small startup, this is nearly impossible.

Thus, in place of this void, companies like Appsavvy, come into the picture. I highly suggest checking them out.

III. Virtual Currency

This business model is astonishing. The concept of virtual currency is profoundly simple, however, the numbers and revenue this churns out is eye-opening (see table below).

In order to advance in virtual games, you need to invest either (i) Your own Time, or (ii) Your own Money.

Being that most people don’t have the time to invest into building a virtual farm, they spend real money in order to save them time. Who’s profiting from this? The game developers. And they’re profiting big-time.

With this powerful element, alternative monetization methods have emerged. For instance, instead of investing your own money in a game, you can take a survey instead–likely, you’ll have to provide your email address. This practice has stirred up some controversy recently with some offers being ambiguous.

So, now the model looks more like this:

You invest either (i) Your own Time, (ii) Your own Money, or (iii) Alternative Method: Take a survey (in which a small fraction are misleading)

Prediction: The virtual currency model will likely experience a minor shake-out of the ambiguous offers; this shake-out will benefit both the consumer and Facebook application ecosystem. I’m predicting that Facebook will outline certain practices that these alternative offers must follow.

This is a long-term business model, and once Facebook outlines specific policies that outlaw some of the misleading offers that have crept through, the cash will start rolling in for these developers without eyebrows being raised.

IV. Virtual Gifts

Virtual gifts may be even more astonishing than virtual currency. Giving a virtual gift is the same thing as giving someone a gift in real life; except one thing: they’re not real. Surprisingly this hasn’t deterred anyone, people are snatching up virtual gifts at an incredible rate.

How incredible? Well, Virtual Gifts are expected to surpass $1 billion for U.S. users in 2009. That’s right, $1 billion. Read more here.

The most important element of virtual gifts centers on its use within Southeast Asian countries.

In Southeast Asia, specifically countries like Indonesia, Facebook is in hyper-growth mode…right now. The only problem is that the traditional monetization model (I. Display Ads), simply do not scale or work in Southeast Asian countries. The only thing that works is virtual gifts–and they work–a lot.

Unfortunately, though, Facebook Developers don’t have access to this monetization model because Facebook has their own Virtual Gift Marketplace.

V. The Numbers

From TechCrunch, here’s a summary of how much Facebook apps are raking in:

Zynga:

• Farmville-61M
• Mafia Wars-25.8M
• Yoville-19.8M
• Texas Hold Em’ Poker-18.3M
• Total Estimated Revenue For Year: $200 million

Playfish:

• Pet Society- 20.5M
• Restaurant City-17.3M
• Country Story- 8M
• 135 million total installs for all games
• Total Estimated Revenue For Year: $75 million

Playdom:

• Mobsters -14M
• Bumper Stickers-11.7M
• Own Your Friends-10.1M;
• Sorority Life-7.1M
• Mobsters 2-3.5M
• Poker Palace- 1.5M
• Total Estimated Revenue For Year: $60m

Wrapping Up: What Business Model Should You Go With?

With Banner Ads, specifically CPA-based ads, I believe it’s only a matter of time before the revenue stream becomes less dominant. You’re going to have to get more creative. The user will cap out at a certain point because there’s only so many times you can see a quiz ads, or game ads. Though you can control this with frequency caps, after a while the revenues will plateau and quickly decline.

Additionally, Southeast Asia is in hyper-growth mode. However, it’s essentially unmonetizable at this stage (besides serving Admax ads, which face a limited ad supply); thus leading to the next point: the most viable way to monetize Southeast Asia and other international countries is through virtual gifts for now.

How You Should Implement These Models Going into 2010:

Display Ads

• Allocate about 60% of your ad space to high-quality brand ad networks (you’ll need traffic, and a lot of applying)
• Allocate about 20% of of your ad space to CPA-based Ad Networks
• Allocate about 10% of your ad space to Job Listing Ad Networks
• Allocate about 10% of your ad space to product/widget based ad networks (Amazon Affiliates, Widgetbucks)

Brand Certain Elements within Your Application for CPS (Cost Per Share):

• Get creative with your application and business model by identifying the major value for your users, and evaluating whether or not you can brand pieces of value without hurting the user experience, but enhancing it.

Virtual Currency:

• Build virtual currency extensions into your application, but be sure to conduct due diligence on who you’re partnering with.
• Keep an eye on this arena, as I have a feeling some players in this realm are going to be called out and chastised if the recent allegations about misleading users are indeed true.
• As a Facebook developer, Facebook made it clear that it’s your job to understand what types of offers are being presented to your users. Have someone on your team routinely click the offers and investigate each ad creative.

Virtual Gifts:

• Virtual gifts are going to continue to be a cash cow well into 2010
• It’s critical that you somehow find a way to implement Virtual Gifts into your application. Why? Because this will be the primary way to monetize International countries; you don’t want to find yourself with millions of users that make nothing for your application because they’ll end up costing you money in terms of support costs, as well as other expenses.
• For now Facebook has the monopoly on this monetization route; however, it seems as if they’ll soon be granting developers access to this revenue stream. Link here

Further Reading:

Recently, Ro Choy of RockYou wrote a two-part series for Social Times on the future of social media and monetization: part one and part two. It’s a fantastic read for those interested in learning more about the state of social media and monetization.

Michael Arrington calls out those behind misleading ads in this post. Very interesting read, and something to keep track of, as Facebook is likely to voice their opinion and policy soon.

Conclusion:

2010 will be the year of social networking monetization. There will be a significant amount of changes, and more players are soon to enter the space. As soon as revenue is released to the public, and that revenue is significant, you’ll see Fortune 500 companies salivating at the chance to get in on the game. And they will. This will likely be met with acquisitions, as well as in-house spinoffs launched to capture some of the pie (think of Hulu’s launch in order to respond to YouTube).

If there’s one thing to take away from all of this, it’s simply:

Be creative with your business model in 2010, be flexible and make sure it aligns itself with the well-being and interest of your users. Good luck!