How does Facebook make money?

Facebook, a social media giant, earns revenue from the users of plethora of services it offers or businesses it owns – Facebook, Messenger, Instagram, Whatsapp, Workplace, Marketplace, Moments, Oculus, MSQRD and Audience Network. Although it may not be charging anything for some of the services it offers but the user base it is able to create due to these offerings is huge and these users only then become potential customers by placing advertisements on facebook or playing games. Also, when users of the facebook play games like Farmville, facebook gets paid for acting as a payment gateway. Besides, it also generates revenue from workplace and oculus.

Revenue from Advertisements

The study of business figures of facebook clearly reveal that the major chunk of its revenue comes from digital advertising. In 2017, total revenue of facebook was U.S. $40.7 billion of which U.S. $39.9 billion was from internet advertising. This means that close to 98% of total revenue was generated by digital advertising alone. The trend has been repeating since 2009 and the figure has been increasing rapidly. From U.S. $0.7 billion in 2009 the figure has increased to U.S. $39.9 billion in 2017. 90 % of this figure relates to mobile advertisement.

The reason these users prefer facebook to other players, is the benefit they get out of it in comparison to the other players –

Targeting – Facebook being a social media site where the users generally put correct information as to their whereabouts, the advertisements can be easily targeted to correct set of audience. Facebook provides various targeting options to the advertiser, that is, on the basis of gender, location, buying behaviour, language preference, type of social circle the user is interested in, Age, etc the segment to which the ad is to be shown, can be selected.

Reach – With over 1 billion users, facebook gives an excellent reach to the advertisers.

Facebook gets paid for every click and view of the advertisement that advertisers place on it. The advertiser also pays facebook for the likes that the advertiser gets from the users of the facebook. However, revenue facebook will be getting from each advertiser depends upon certain factors that affect the cost of advertisement.

The motive behind advertising – If advertiser’s motive behind advertising is getting maximum number of clicks, that is, directing traffic to his website & promoting brand awareness then facebook will be earning less from such advertisement as compared to when advertiser is looking for conversions/leads.

Advertiser’s industry and product –More competitive the industry, more is the cost and hence more revenue for facebook.

Advertiser’s target audience – Facebook provides option to select through 350 audience attributes and their further combinations. More relevant the audience, lesser is the cost of advertising involved and hence less revenue.

Depending upon the above factors, the advertiser would be paying facebook, money on CPC (Cost per Click) basis or CPM (Cost per 1000 impressions) basis.

Advertisers pay facebook on CPC or CPM basis but it records its revenue on per user basis. Facebook’s financial figures of Q4 in 2017 show its ARPU (Average Revenue Per User) to be $6.18.

Revenue from Payments Business

Besides the advertising business, facebook also earns money from its payments business. When the facebook users play games like Farmville, Poker, etc and get paid in the process, facebook gets paid for acting as a payment gateway for each such instance.

Revenue from Workplace and oculus

Workplace is a private social media networking site whereby employees and other related people of a company can connect and discuss projects and ideas. This business generates revenue per employee from the company using it.

Oculus is a virtual reality hardware manufacturer, which has been bought by facebook in the recent past. Facebook is making money selling its virtual reality products.

We can thus say that facebook is leveraging upon its user base to generate its revenue.