Social media monetization: 6 business models for social networks

I was doing some research for a client’s article about social media and was following some leads on specific social networks that I wasn’t familiar with. Unfortunately, many of the leads were dead ends as one company after another turned out to have gone out of business. Many of them failed because they had a good idea but couldn’t monetize it.

That’s the conundrum in today’s social web: You need a critical mass of users to make your network a network and you probably need to bring them in for free in order to build that critical mass. BUT (and this shouldn’t come as a surprise to anyone), offering a free service doesn’t pay to keep the lights on or the CFO’s coffee cup refilled. At some point, you need to find a way to make money off of your network.

Here are 6 monetization models for social networks (and some sites, like Facebook and LinkedIn use a combination of them):

  • Free with advertising. People sign up and that gives you lots of eyeballs. Then you give advertisers a way to market to them. Facebook does this. LinkedIn does this. It’s pretty standard.
  • Free with tiered paid service. People sign up to get the bottom rung of service. If they want to get more out of your social network, they need to pay. LinkedIn does this (although not very well in my opinion).
  • Free with other offerings monetized. Participants enjoy a network for free and the business sells products that maybe purchased by users or by non-users.  This model is a classic model employed by businesses that offered forums to their users who would participate in the community and maybe buy things from the store. In a sense, the network is a loss leader. Facebook selling search data is another good example.
  • Free with revenue sharing. People participate in the network and revenue from any purchases made is split between the network and the user. Squidoo lets users post Amazon or CafePress products on their pages and then splits the revenue with them.
  • Full paid service. Users need to pay in order to use the service at all. This could be the most challenging to start but, if you can create a sense of value, you may still get an audience. There are lots of these out there but I suspect most of them are very small and very targeted (which makes sense).
  • Kickbacks. This is interesting, and I’ve heard that Twitter may generate some revenue from this (although I’m skeptical about that rumor). Basically, a social network creates an audience and opens itself up so anyone can use it. Rather than getting paid from users, they get paid from companies that create tools for the users to use. I can’t think of a real-life example, but a fictional one might be: TweetDeck pays Twitter a few cents for every TweetDeck user… it’s a sort-of licensing fee. I think there could be some successful monetization from this model but I’m not aware of any actual examples.

If you have capital at the very beginning, you don’t need to monetize your social network right away. But eventually you will. The most likely to succeed in the long-term in a big way is a free plus tiered paid model. Advertising is becoming increasingly challenging to do well (partly because there is so much crap being advertised and partly because privacy settings can make it challenging to target users effectively). In the long term, I can see Facebook and Twitter eventually moving to a free+tiered-paid-service model as its primary monetizing method.

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