Making Money with Social Networks

I recently read a (german) post on potential revenue streams for social networks and I thought I’d add a few points. Of course there are lots of different ways to make money in social networks, like eCommerce, Premium-Accounts, WOM-Campaigns and more. The big question is really how much money that will be and how will it be managed. Remember, real people don’t scale, and if you need real people to handle the setup of special marketing projects or account within a social network, then that just doesn’t scale. That is where the value will really shrink in terms of what people are willing to pay for a social network from the investment side. Facebook is surely not worth billions because they can hire 20.000 people to talk to all the companies out there to set up special accounts on the network and optimize their interaction with their existing and potential customers.

The big point the post makes is that word of mouth marketing will be big in social networks and for those looking a bit behind the scenes of Ormigo, which is still very much in the beginning, we truly believe that this is something very important going forward. The problem is how to monetize it without endangering the relationship you have with your users. You don’t want a suggestion if you feel the suggesting party is making money by doing so. So saying “tell your friends about your digital TV and I will pay you” will not work. And I really doubt that Facebook will say “if you don’t pay us the message about buying a digital TV will not appear in the friends stream”… .

The valid point is that there is potentially a lot of value to be created by being able to tab into the social network of your users to find out more about them, but we have data oozing out of our ears and we are already not able to fully exploit it because it is so complex to think about or difficult to filter out the meaningful data based on standard models. A lot of times it is just having the right offer that is the hardest. Sure it is nice to know that you had your eyes fixed in a lasik surgery but without an advertiser in the space I cannot really do anything with that information. So I need all advertisers first or a lot of money to get over the dry stretch of not having them.

I have no doubt that social networks will make money, but based on the conversion rates we are seeing on social networks and on standard content portals, it is just worth A LOT less to advertise there and the content portals are already having problems working profitably. Just being the knot that ties your life together will only lead to immense server costs and not to profits. It will be highly challenging to increase your revenue ten fold through WOM or eCommerce. There is money to be made, sure, but it’s simply not enough.

As always I believe in performance advertising and this includes WOM or other forms of advertising with the only real challenge being now to be able to measure it. What gets measured gets done, or so they say. If we find a way to measure these kind of effects that Social Networks will be good at, we can integrate them into our performance advertising measurements and true money will flow in the direction of social networks.

Lots of thinking going down that road I think, so I am looking forward to seeing measurements appear that people really understand and that are valid. An example would be that if I can run an add on Twitter, and it gets Re-Tweeted 100 times, I might pay $100 CPM for displaying that ad the first time, because I have an effective $1 CPM which might be worth-while.