Social Commerce

Will Facebook’s Real Business Model Please Stand Up

On the surface, Facebook’s business model appears to be very straightforward – get people to share information about their lives and wrap relevant advertising around it.

As it turns out, things are not quite that simple says a Fast Company article: “The social network filed an S-1 on Wednesday in advance of its IPO that presents a more complex and nuanced picture of the company’s business–one that highlights the tradeoffs Facebook has to make in order to create value for both users and advertisers, as well as of the creative challenges that lay ahead.”

Advertising is the mainstay of Facebook’s revenue model and that won’t change. The network’s challenge is to create ad content that is relevant and interesting to its users, as opposed to intrusive.

To accomplish this goal, Facebook’s emphasis has to shift from growing the number of users – currently estimated to be 845 million – to increasing the time each user spends on the site. That, according to Fast Company, is the only way the social network can credibly deserve its $100 billion valuation.

It’s a bit of a vicious cycle, really. In order to increase ad revenue, it has to increase ad relevance. In order to to that, users have to spend more time on the site and be willing to share more stuff. In order for that to happen Facebook has to increase its value to them.

Making Facebook a better place for its users has always been Mark Zuckerberg’s goal. In a letter that accompanied its S-1 filing, Zuck shared his personal philosophy, one that guides the company’s mission: “We don’t build services in order to make money. We make money in order to build better services.”

If creating more relevance is the key to Facebook’s financial future, the Open Graph, which allows third-party sites like Pinterest, Payvment, and others to integrate with the network, is its path to get there.

Facebook’s use of a display advertising model has always seemed at odds with its mission. I mean, no one goes to Facebook in order to see ads. As a result, the click-through rate has historically been low – less than 1 percent on average. Even so, that business model is not going away, so it has to get better. “The more people appreciate the ads, the less risk of alienating them and reducing usage of the system. And the more people react to the ads, the more valuable they become to advertisers,” says Fast Company.

Iteration, innovation, experimentation…those are all keywords to consider in launching this social commerce revolution. That’s why, according to Fast Company, there are signs plastered on the walls of Facebook’s Menlo Park offices that say “this journey is 1% finished.”

1 comment Add New Comment

  1. Ok, so you’re summarized the problem in six redundant paragraphs. Now what’s your point of view? What should FB do? This blog is not news, we come here for opinion.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.