How does Facebook Make Money

How does Facebook Make Money – Analysis by Unicornomy.com

How does Facebook Make Money
How does Facebook Make Money

About Facebook, Facts & Figures

How does Facebook make money is what everyone wonders, but very few know!

FaceBook Business Model requires ZERO sale of data to make money!

Facebook is one company that every investor wants, that everyone knows off and that is always in news for its spectacular earnings report 🙂 .  What very few people know of is that Facebook gets appx 85% of its revenue from Advertising Sales [No wonder Mark Zuckerberg (The FaceBook Effect gives the right account of what really happened at FB) was scouting for Ad-Sales Executive Level Candidate for Facebook COO Role – Sheryl Sandberg, She is also known for her book Lean In – Must Read for Women Entrepreneurs].  This revenue is about appx 14 Billion USD (Dec’2015).

They have made more money than top 2 advertisers in the US, just by advertising revenues, this truly makes an awesome and inspiring business model.

Rest of the 15% comes from revenue share or commission from virtual goods sale like that of paid credits (coins) for FarmVille.  Users for advancing on to next levels needed virtual money and they bought it from Zynga (Creator of FarmVille) by paying real money (What Stupids!).  Facebook takes up to 30% cut from the total sale achieved for such transactions.

How does Facebook Make Money

For Understanding How does Facebook Make Money we need to first understand couple of Jargon Keywords from “User-Driven Business Models“.  They are listed down below:

  1. ARPU – Average Revenue Per User : This is the money contributed by ONE USER to the overall REVENUE Pool.  For e.g. If a company made about 1000 USD from 100 Users, the ARPU would be 1000 divided by 100 i.e. 1000 USD / 100 USERS = 10 USD / user.
  2. TimeLine : The infinity scroll that you keep on swiping up to see what’s going on in others lives.
  3. Adverts : Stupid looking ad banners at the sidebar or somewhere you won’t bother to see (Used to be earlier mode of advertising by Facebook, currently active on Web Browser mode only, not available on App or Mobile Websites)
  4. Self Serve Ads : The Ads (Sponsored Updates) that you can create yourself by clicking on some weird options.
  5. Unit Economics (For Advertisers) : Their Conversion Rate essentially – the number of impressions vs number of sales achieved and the money made each sale.  Read more about unit economics.

How does Facebook Make Money via User-Driven Business Models

FaceBook makes money on the basis of the following principle that if you don’t pay for the product, you are the product.  Which means that your time share is being sold to potential sellers (advertisers) on the social network.

How does FaceBook Earn Money
How does FaceBook Earn Money

How does Facebook Make Money from FB Groups

FaceBook is also planning on making money from Groups.  Their tech is testing out showing ads in high activity groups, even if they are closed or secret groups.  The idea is that people who are only active in groups should also not be left out of the ARPU net.

How does Facebook Make Money should also be pondered upon while considering it’s subsidiaries.  It has a mammoth number of subsidiaries which also contribute to the top-line of FaceBook.  E.g WhatsApp, Wit.ai etc.

Facebook Business Model 

Let’s Face it:

How does Facebook Make Money from selling data? is an Utterly disgusting question!

People asking such childish questions should be drowned in their own Tears of Disgust 😀 .

You can Read this for More Effectively analysing Business Models.

Many users (and Brainiacs alike) think that the ulterior modus operandi of Facebook to earn money is selling (or is somehow harvesting) your personal data.   Let’s face it – After Google and you, its only facebook knows when you sh*t and when you not.

But to the contrary, the entire business model of facebook is free of Data Mining your personal information.  They would rather not do it and keep the user as opposed to selling your data and giving away too much information – They would harvest this till your life.  On the contrary, Twitter Business Model heavily relies on selling data as a primary source of revenue.

What Facebook’s real business model is renting out your time and eyeballs to a couple of business or hype-hungry advertisers.

Entire revenue line depends on self-serve ads being circulated within the timelines of users scrolling through the infinite vertical scroll.

Facebook Revenue Model

Before understanding How Facebook Makes Money, Following are the Revenue Models for Facebook that you should know of:

  • Self Serve Ads – Ads / Sponsored “Things” created by Advertisers : Advertisers / Users can sponsor Pages, Posts etc for a wider reach for as low as 1 USD (Here is a screenshot of how it looks in a user’s timeline feed)
FaceBook Business Model via Ads Platform
FaceBook Business Model via Ads Platform
  • This Self Serve is replicated across Devices (Tabs / Mobiles / Desktops) : On wider screens – This ad is replicated in timeline feed as well as the sidebar of Facebook Page
  • I am sure you must have got one FarmVille Request in your Facebook Life : FarmVille Users advance levels by successfully implementing the strategy of harvesting and selling the produce > Or purchasing sufficient coins to lay more produce and then advance faster.  Many people prefer the latter route and thus facebook acts as a middle man (provides payment capability and thus the payment gateway business model relates here) to a user playing that game and in turn takes 30% of the sale generated

The beauty of How does Facebook Make Money is visible in the desperation of people like Flipkart, SnapDeal, Amazon and the likes who will die without serving ads to people to buy their on-sale products.

LinkedIn makes much lesser in Volumes in Ad Sales but the value per user is tremendous in the LinkedIn Business Model.

How does Facebook Monetize its Large User Base

Consider this: You spend appx 12 Billion Dollars a Year for providing world class cloud infrastructure to customers and paying of maintenance and salaries blah blah… and you have a customer base of 1.5 Billion Users .. Great isn’t it?  Assume you are making 5$ from all of these customers annually.  But it’s a hell of a ride to add more users with this 5$ fee, the best thing would be to give it away for free, isn’t it?  This is the theory behind How does Facebook Make Money.

Now imagine none of those customers is paying you and is still using your infrastructure, now how would you make money?  The answer lies in the question itself – Give it away for free and make it sticky – & embed some products in your infrastructure so that users can’t avoid using that (seeing that) while using your product.

This is what happens at facebook, they inter-wind you with your friend’s lives and them to yours so that you are hooked onto it –  to know what’s happening at the other end.  And in turn, while getting to know that you eventually pass through layers of advertisements (like watching you favourite sports with loads of advertisements every 5 minutes)

Now what facebook earns out of you while showing you advertisements is the total revenue and when we discount that number by the total active users that saw those advertisements – we get Average Revenue Per User [ARPU] (Dec 2015 Numbers filed with SEC US say that Facebook made about 5.2$ from a User on an Avg).

The total revenue for any month would be = Monthly Numbers of Active Users * ARPU.

This number, when totalled for the year, would give partial numbers on the revenue about How does Facebook Make Money and the rest of the money would come from non-advertisement based sources.

Facebook also makes money by VR because it sells Oculus Rift (Virtual Reality Based Device) which also contributes a very insignificant amount to the total advertising revenue mammoth.

I hope you have enjoyed the analysis of How does Facebook Make Money, if there are any questions wrt the same I will be happy to answer them, please post your questions in the comments section below.

Disclaimer: The analysis of the How does Facebook Make Money or Facebook Business Model is of the Authors’ himself, neither the company (Facebook Inc) nor its affiliates have confirmed the same to the author and the descriptions, stats, facts and figures are either obtained through secondary web research or interrogation of the users / advertisers or other resources on the web.  Please use your own discretion to use this info when required and by continuing to read you agree to indemnify the author from all liability arising out of using this info on your own.

Unicorn Economy
Unicorn Economy is your answer to all startup related queries with respect to business strategy, business model analysis and consulting. One stop stop for business plan and financial model development.

10 Comments

  1. Hi,
    Thanks for the great information. One question, for these user-driven websites which rely heavily and primarily on advertising revenues, could it mean that it could be earning almost or even zero in its start-up phase till it is able to garner a sufficient number of userbase for other companies to invest in advertising opportunities with the site? Also, how do such website calculate their evaluation at the start without income?

  2. Hi,

    Thank you, Unicorn Economy for this interesting piece of information!
    It is indeed very hard to get information on Facebook’s business model.
    I am currently writing a thesis about User Data-driven business models.
    I would be interested in interviewing the author of this article if that would be possible

    Feel Free to contact me through my email!

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