Friday, February 10, 2012

How Facebook Ad Business Works - Simple Example


As a Social Media Campaign Management software provider, I often have to tell people, in the simplest way possible, just how social media giant Facebook makes money.  I celebrated a birthday recently, and the numerous well wishes posted to my “page” on my birthday provide a great opportunity to illustrate the Facebook monetization model with a real-world example.
Here is a breakdown of some simple math:
  • Number of friends who posted on my  “Wall” = 201
  • Number of friends who returned to check other’s comment after seeing a notification = 20% = 40
  • Number of times friends came back to the wall (typically after every 5 new posts on my wall) = 40
  • And lastly, the number of “page views” I generated for Facebook = 40×40 = 1,600
Now, this activity easily gave Facebook an opportunity to place one or two new advertisements on my home “page”. Let’s assume average is 1.5, so total number of ads Facebook placed = 2,400
Money Facebook charges an advertiser per thousand ads (“CPM” for experts) = 50 cents to a dollar (estimated). So net-net, Facebook earned around $1.20-2.40 on advertisements posted on my wall on my birthday.
Given Facebook’s massive user base (some estimated 800 million) and an expected revenue of $4 Billion this year, it only has to bring in $5.00 per user, per year.  Easy to see just how it all adds up.
Admittedly it’s a simplistic scenario, but hopefully clearly illustrates the monetization model with a real-life, real-time example.

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