How does Facebook make money? How does Facebook accrue revenue from Advertising?

 What is a business model?

Brief Introduction of Facebook

How does Facebook make money?

How does Facebook accrue revenue from Advertising?

Why does Facebook offer its platforms mostly for free to users?

1. What is a business model?

The business model denotes the core aspect of your business by which your company generates revenue.

It also includes the purpose, business process, target customers, offerings, strategies, infrastructure, organizational structure, sourcing, trading practices, operational policies and processes, and culture. Read more.

2. Brief Introduction of Facebook

You are well aware of Facebook, yet a brief introduction is given.

Facebook is a social networking company that innovates information technologies. Those technologies make it possible for people/users to connect with friends and family, find communities, and grow businesses.

Facebook, founded in 2004 by Mark Zuckerburg, is an American online social media and social networking service owned by the company Meta. Previously, the company was named Facebook Inc. It was founded in 2004.

The founder, Mark Zuckerburg, announced the name change on October 28, 2021.

The name change shows its aspiration to move beyond its social media platform to Metaverse.

It is expected that the Metaverse will be a substitute for the internet in the future. Metaverse is a term that combines two giant words 'Meta' and 'Universe'.

3. How does Facebook make money?

Facebook users are not charged even a single penny for using the FB platform for sharing their posts, photos, activities, and the like.

Then, you might question,

How does Facebook make money?

What is the secret revenue model of Facebook?

In the intro part, you must have noticed the line that Facebook is a social media and social networking platform that connects millions of people.

Suppose you are a businessman. When you see millions of people hanging out on a single platform, guess what comes to your mind?

Yes, your guess is right.  

Advertising on Facebook.

Facebook earns from the information provided by you. Users, like you, are the most prosperous assets to Facebook.

Yet, the term asset does not meet the required definition of the Reporting Standards, and it is thus not recognizable in the balance sheet.

Facebook knows you better than anyone. Facebook knows you better than your Valentine. I am sorry if your feeling is hurt by this sentence. But this is the fact, and this has become possible through the technologies that Facebook or any online platform like Facebook is using.

Facebook retrieves the information which you have provided while registering. Facebook also saves information from your past activities, posts, shares, etc.

This is the hidden money-making formula for Facebook. All information is customized and targeted to specific advertisers for ads.

And, advertisers use this customized information to target specific users for their products and services through their ads.

When Facebook was in its infancy during 2004, over one million people had registered and, in the same year, companies such as MasterCard offered to pay for advertising on the website.

Since then advertising has become a fundamental revenue source for Facebook.

Recent statistics show that Facebook made $117 billion in revenue in 2021. Out of which, the advertising amounts to $115 billion which represents 98% of total Facebook revenue. The remaining 2% of the revenue came from non-advertising sources like payment fees from developers, through selling Oculus, and Portal devices.

Revenue Streams of Facebook- A summary: 

1. Advertisement
2. Non-Advertising sources

-Sales of hardware

-API Fees from WhatsApp

-Facebook’s payment services

-Renting of unused capacity in its fiber network

-Subscription fee for its Workplace tool

 

 

4. How does Facebook accrue revenue from advertising?

With 2.9 billion monthly active users, Facebook can be considered a giant social media leader.

In the third quarter of 2020, Facebook stated that 10 million active advertisers were using social networking platforms to advertise their products and services.

Users and advertisers are the key components of Facebook advertising revenue.

Although Facebook does not charge users for using the platform, the value of Facebook's business model is highly dependent on users.

Advertisers are primarily small businesses that use the platform only to show ads to the targeted users. The price that advertisers are required to pay is determined through auction and demand-supply dynamics.

Advertisers bid for space for ads that are to appear within users' feeds and stories they post on Facebook and Instagram.

5. What are Facebook revenue drivers?

Users and advertisers are the key components of Facebook advertising revenue.

But, Facebook does not charge anything from users for using the platform for sharing their personal information, photos, links, news, etc. You might question how users are core drivers of revenue.

The answer to your question is given as follows:

Revenue = No. of Users*Time spend by users on FB*No. of Ads shown per unit time*Charges per ad

More the number of users, the more the revenue of FB.

More the time spent by users on FB, the more the revenue of FB.

The more the ads shown per unit time, the more the revenue of FB.

More the charges per ad collected from advertisers, the more the revenue of FB.

6. Why does Facebook offer its platforms mostly for free to users?

Facebook does not charge anything from users for using the platform for sharing their personal information, photos, links, news, etc.

Facebook retrieves the information which you have provided while registering. Facebook also saves information from your past activities, posts, shares, etc.

All information is customized and targeted to specific advertisers for ads.

And, advertisers use this customized information to target specific users for their products and services through their ads. This is the reason the FB platform is free for users.

Facebook tracks our behavior through a bunch of apps, algorithms, and software. This is the reason Facebook knows about you better than anyone else.

Your Valentine might forget your birthday but Facebook will never do that.

Through these technologies, Facebook then builds your customized profile that is targeted to particular advertisers that have kinds of stuff suiting your profile.

Users are money plants for Facebook. As the number of users grows the money of Facebook grows too. The money-making formula is also linked to the users. 

But, what about the interest of the users and advertisers. Whose interest is prioritized by Facebook?

The answer is obvious. And, the recent privacy and security breaches have also proved this.

Your information leverages the revenue for Facebook. Facebook is getting your information free of cost. Advertisers bid for space for ads that are to appear within users' feeds and stories they post on Facebook and Instagram.

The ultimate payers of the bill are the advertisers. Facebook cares a lot about its advertisers. This is the reason the FB platform is free and will continue to be so in the future.