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How does Facebook make money?

Mohit Nayak | July 16, 2011 | 2 Comments

facebook-advertisingI was sitting idle in office the other day, when a discussion on Facebook sprung up. A colleague asked me, “How exactly does Facebook make so much money?” My first guess was by default – Advertising! But can figures like $1billion come only due to advertising? ..

While Google’s Ads are context based, i.e. dependant on the content of the page they’re on; Facebook’s Ads depends on the user. As security analyst Bruce Schneier proclaims: “Don’t make the mistake of thinking you’re Facebook’s customer, you’re not – you’re the product”

YearRevenueGrowth
2006$52m
2007$150m188%
2008$280m87%
2009$775m177%
2010$2,000m158%

That’s right.Facebook is earning because of – YOU! If there’s anything Facebook knows, its demographics. Boasting a user base of 750 million, facebook has all the user data it needs. Say you like sportswear in your profile. Facebook uses this fact to display ads related to sports for you, thereby increasing the chances of you clicking on them. By the way is it just me, or do Facebook ads look way more cooler than Google’s. Also, ads in Facebook cover a variety of domains covering products like sunglasses to even services like Plumbers in Philadelphia

Facebook's neat ads!

With the power of knowing what people like, Facebook flourishes in its ad campaigns. Facebook allows advertisers to select the target audience as well. You can select your audience by location, age and interests. You can select an image and make your own ad. Maybe I should consider using that 75$ Facebook Ad credit I have :)

To show you how FB uses demographics effectively consider the following as explained in a NYTimes article.

1) An 85 yr old women : Ads shown are health related.There are also other ads like ‘Computing for senior’ . Click on the image below to enlarge

Ads for an 85 year old women.

2) Engaged man : When a man changed his relationship status to engaged, ads prompting to buy romantic gifts, wedding planning etc were shown on his page. Click on the image below to enlarge

Ads for an engaged man

 

3) Engaged women: When a woman changed her relationship status to engaged, she was shown ads concerning wedding and honeymoon destinations, wedding checklists, wedding photos etc.Certain long term aspects like pregnancy were also targetted. Click on the image below to enlarge.

Ads for an engaged woman

 

4) Teenage Girl : The teenage girl was shown ads about proms, teen chats, videogames etc.

Ads for a teen

In short Facebook uses your gender, your relationship status, your age, your likes and favourites to literally exploit your chances of clicking on ads.

Facebook also has interactive ads [called engagement ads] which allow users to answer questions and  like the ad page.

Facebook Gifts : Gift are a another contributor to FB’s revenue. The gift shop, it’s a product which enables users to send virtual gifts to one another. At an average cost of $1 per gift, Facebook gifts have become an extremely lucrative business, generating upwards of $100 million last year. Facebook has been slowly opening up the gift shop to third-party developers in order to increase the variety of products sold through the shop.

FB Gifts

To conclude, I’d like to say, Facebook is tracking your every move and in turn using it to do business. Advertising is the major contributor in FB’s ever growing revenue chart! And YOU really are the PRODUCT!

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