While most industry insiders have a firm grasp on Facebook’s monetization models, most people still don’t understand how Facebook makes money. For those that still don’t know how Facebook makes money, we thought we’d take the opportunity to break down Facebook’s various revenue streams including past and future streams of revenue. After reading this guide, you should have a complete understanding of how Facebook makes money.
Advertising Business
Facebook’s single most important revenue channel is advertising. The company has always been ad supported and most likely will always be ad supported. While some have claimed that Facebook will one day charge for access to the site, those rumors are completely false. Facebook generates over half a billion in revenue each year, the vast majority of which comes from advertising. So who is paying for advertising?
Self-Serve Facebook Advertising
The largest chunk of Facebook’s advertising revenue is the company’s self-serve advertising platform. By visiting the following page you can set up your own advertising campaign on Facebook. These advertisements are displayed in the sidebar of most pages of the site. That includes user profiles, events, groups, Facebook Pages, and third-party applications. The primary advantage of Facebook’s self-serve advertising platform is the granular targeting features.
Over the past few years Facebook has increased their targeting capabilities, including the ability to limit advertising to metropolitan areas as well as the following target variables: gender, age, network (workplace, school, etc), profile keywords, relationship status, and more. Facebook recently released the Facebook Ads API which provides large ad buyers with the ability to build robust ad managers on top of the Facebook advertising platform.
We’ve written about a number of companies who have built services on top of Facebook’s Ads API. To boil it down, the Facebook Ads API enables Facebook to reduce the amount of friction large advertisers (those who spend more than $10,000 a day) have in posting new advertisements and modify existing ones. According to numerous sources, Zynga, the developer behind the largest games on Facebook (FarmVille, Café World, etc), is the largest purchaser of Facebook’s self-serve ads.
Small businesses like doctors, lawyers, restaurants, and others are also responsible for a large amount of Facebook’s revenue generated by the self-serve advertising platform. If you want to learn more about Facebook’s self-serve advertising platform, check out some of the articles below. We expect Facebook to generate somewhere in the range of $450 million this year (2010) on self-serve ads.
- Local Advertising On Facebook Is Big Business
- The 10 Laws Of Facebook Advertising No Marketer Can Afford To Ignore
- Facebook Launches Friends Of Connections Targeting For Ads
- 5 New Features In The Upgraded Facebook Ad Manager
Engagement Ads
In addition to Facebook’s self-serve advertising product, Facebook also generates a substantial percentage of their revenue through their “Engagement Ads” product. Engagement Ads are Facebook’s solutions for large brand advertisers. Facebook places all engagement ads on the site’s homepage. Once a user logs in, they can interact with advertisements (like to one pictured to the right) which are placed on the right-hand side of the homepage.
Facebook has been ramping up their efforts to recruit brand advertisers in a number of ways but last September Facebook stepped up their efforts with the launch of Brand Lift. Brand Lift is essentially a product which enables large brand to test the effectiveness of their advertising campaigns almost immediately after their campaign is run. Facebook believes this increased level of measurement will encourage brand advertisers to spend more on Facebook Engagement Ads.
If you want to learn more about the Engagement Ads product, you can check out the articles below. We expect Facebook to generate around $250 million in brand advertising this year.
- The 4 Types Of Branded Facebook Campaigns
- Facebook Tests New Direct Offer Engagement Ads
- Brand Lift: Facebook’s Answer To The Brand Advertising Conundrum
- Live Coverage Of The Brand Lift Announcement
- New Dirty Jobs Ad Highlights The Power Of Engagement Ads
- Facebook Adds Fan Feature To Poll And Event Engagement Ads
Microsoft Banner Advertising Agreement & Search
Previously, Facebook had an advertising agreement with Microsoft for displaying large banner ads on the site. Recently, Facebook removed the advertisements internationally and it appears that they could be completely phased out of the site by the end of the first quarter this year, according to a Facebook presentation that was presented in Poland earlier this month. Facebook is phasing out the banner advertisements from Microsoft as they want to be completely self-sufficient. Total revenue generated from Microsoft advertising will be less than $50 million this year as they phase out banner ads completely.
Another less discussed agreement is the one Facebook has with Microsoft over search. When Microsoft invested $250 million in Facebook at a $15 billion valuation, part of the investment included an agreement to integrate Microsoft’s search results into Facebook. The terms of the agreement have never been public however we believe that Microsoft may be paying Facebook beyond the terms of the initial agreement. Unfortunately for estimate purposes we have to assume that this revenue is negligible although we believe it to be worth at least $150 million a year.
Virtual Goods And The Gift Shop
Facebook currently generates a large amount of revenue from the Facebook Gift shop. For those less familiar with 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.
In August of last year, Facebook began opening the gift shop to non-profits and by September it was opened to a number of other developers. During the ongoing Haiti crisis, Causes has been offering users the opportunity to purchase gifts which directly benefit victims of the tragedy. While there are few public estimates of Facebook’s gift shop revenue, we’d expect Facebook to generate upwards of $150 million from their gift shop this year.
Facebook Credits
That last way Facebook generates revenue is through their Facebook Credits program. Initially used as a way for Facebook users to purchase virtual goods through the Facebook gift shop, Facebook is slowly opening up Credits to third-party developers. The purpose is for developers of applications, like FarmVille and other large social games, to integrate Facebook’s Credits product directly into their applications.
Facebook will in turn take a large percentage of all virtual goods sold through applications. As we wrote in our 2009 Facebook Recap, Facebook has been testing a number of ways to integrate Credits. In addition to testing out alternative payments for Credits for those users without access to credit cards, Facebook has been testing user-to-user credits as well as in-application credit integration.
Facebook is widely expected to release the Facebook Credits product for developers at this year’s f8 developer conference being held in San Francisco this April. While it will only begin rolling out later this year, we expect Facebook to generate $150 million in revenue from their Credits platform this year. This could expand up to a few hundred million in a short period of time as the volume of virtual goods sold on Facebook grows beyond $1 billion a year.
Conclusion
Facebook makes money a number of ways however advertising is the company’s revenue channel. With self-serve ads becoming a booming business for Facebook and with the growth of Engagement Ads, Facebook could be on track to generate up to $1 billion in revenue this year. While our estimate is aggressive, Facebook has been experiencing continued growth and through further education about the company’s advertising products, we’d expect Facebook to stay on track to almost double previously quoted estimates of last year’s revenue: $550 million.
While many users still wrongly think that Facebook will charge users because they aren’t able to pay for the site, the reality is that advertising is proving to be a very big business for Facebook.
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That's why I love AdBlock-I never see any ads.
Comment by mark lehman — January 19, 2010 @ 6:48 am
Nick,
I am pleased that Facebook is making money in so many ways.
It demonstrates that a social media property must find a solid revenue model in order to become sustainable.
It would be interesting to see how well Facebook could do in expanding their gift sales by partnering with major e-commerce platforms. The key would be to make the gift giving process become a part of the conversational format that is at the root of Facebook's success. I think that it can be done.
I highlighted a discussion on this topic in my blog the other day.
Comment by Bruce Christensen — January 19, 2010 @ 7:11 am
With such a large audience, Facebook has potential for advertising if executed properly. But I continue to be appalled at the arrogance demonstrated by Mark Zuckerberg and his obvious disdain for protecting the privacy of Facebook users. His recent comments show that he has learned nothing. Quite the opposite in fact. Zuckerberg feels a sense of entitlement to exploiting user-created content and preferences for personal gain, your privacy be damned. I would have thought the disastrous Beacon fiasco would have taught Zuckerberg something, but based on his recent comments, it's obvious that he has learned nothing.
Comment by Bob — January 19, 2010 @ 9:37 am
I have a safari GreaseKit script just to block facebook ads.
It works perfectly… haven't seen an ad for months.
They need to come up with a more elegant design for the ads.
I hate to see my friends photos with ads next to it or anything else.
Comment by Rod — January 19, 2010 @ 9:41 am
Yeah no doubt! No Script on Firefox does the same thing. No ads, and I block ALL the nonsense FB applications.
Comment by Brian Hanson — January 26, 2010 @ 5:14 pm
I have heard that, just by logging into the facebook generates income to the Facebook, without clicking on the Ads. Is it true?
Comment by Rajiv — June 3, 2010 @ 10:04 am
I also heard that facebook is planning the facebook credits to a vitual currency which can used on facebook partner sites
Comment by Tyrone — June 13, 2010 @ 4:55 am
Facebook is pretty odd to me. Millions of people sitting in front of plastic boxes typing on a plastic keyboard for hours on end. People are like cows at feeding troughs, and the food is a misguided belief that facebook is an essential part of socializing and that everyone must be connected and "stay in touch." It's amazing how willing some people are to spend hours and hours online, just clicking away, making companies rich. Pretty ingenious.
Comment by Dave — July 23, 2010 @ 4:02 pm
You decide to throw a little party with some of your closest friends. After dinner and a few drinks, you're all sitting around chatting. The outside air feels great, so you open the windows and the doors. Things are going well when a salesman sees the open door and walks right in. He seems to already know a great deal about you and each of your guests. This delights some – as they find a good measure of things they didn't know they needed, while this inside knowledge greatly disturbs others. People begin to leave.
Comment by Aston — August 20, 2010 @ 5:36 am
well i would like to work with facebook on creativity and also on my local area designing a webpage for swahili version so that it can enhance the user of east africa and central who speaks and write swahili(mind you swahili is the 7th ever speakean and currently used language in the world and also be an official language in africa union summit,east african annd central,and in the commorow island)
by being part,it can maximize your industry.
please dont hesitate to contact me .
Comment by kelvin kimaro — August 29, 2010 @ 3:51 am
hi……kelvin kimaro
i want to ask & share something with u
u can catch me on my fb account
my id is vinay8088@gmail.com
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m waiting………….
Comment by vinay — September 20, 2010 @ 12:19 am
what about facebook selling user data to 3rd parties, like google do do?
Comment by Jack — December 19, 2010 @ 7:33 am
what about facebook selling user data to 3rd parties, like google do do?
Comment by sharyar haji — December 31, 2010 @ 3:07 am
It would be great if AdBlock and other ad-blocking plug-ins were installed by default in FF and Safari. Many people aren't aware of it exist.
Comment by multipass — January 7, 2011 @ 9:05 am
ok
we underestand that how facebook make money with members
but we want to know what facebook doing?
facebook just take money and member work for him
and when he sell facebook he sell members that trust to facebook
if he like members just alot of her money give to members with random
Comment by mojtaba — January 11, 2011 @ 10:22 am
More and more companies many of them producing bullshit products compete for customers and spend more and more money for advertising which the overwhelming majority of users especially in the internet just ignoer or even never see…its like a pyramid scheme. A lot of people throwing a lot of money into it while only very few can actually earn a profit.
It's a giant bubble just like the housing market in many countries which led to the banking crisis or the credit cards debt bubble.
Comment by myopinion — January 16, 2011 @ 3:39 am
I tried this: http://fb6cebic31tsdq8cj2pkzsij95.hop.clickbank.n...
one month ago,and it's….good way to use Facebook Ad
Comment by janny — January 27, 2011 @ 5:57 pm
If you don't like it..don't use facebook. People want free services but they don't want anything back. who cares if they share your personal things with companies. If you don't want them to know something, simply don't put it on your page. Yes he is entitled to share your information with anyone, as you are entitled to register for free. Give and take. There is no such thing as a free lunch.
Comment by Ned — February 24, 2011 @ 2:37 pm
It seems like you have no friends on facebook to connect with in order to hate on it. They don't sit hours clicking links. They sit hours taking to friends, see what their up to, who got married, who went to college. People you can't connect with on an everyday basis, you have facebook to update you with their life so that you feel like you are still close to them. Thats the essence of facebook.
Comment by Ned — February 24, 2011 @ 2:39 pm
I was in the meeting last night. There are three model of business. Incentive base, Commodity base and loyalty base.
Incentive base is like Amazon.com etc. where you get cheaper price or free shipping or coupon etc and you keep going to their site and keep buying and making them money.
Commodity base is like any product online stores like Best buy, Walmart, etc where you can find latest or necessary product in a reasonable price. One keep going to those site based on their interest and keep making them richer.
One is Loyalty base, like facebook. You know someone and he leave facebook. Are you going to leave? No, you keep going on….
I know and that one company have combined all these three and brake the tradition and make you money as well as they make money too. (ultimate goal to make money for every one right?) and that Interest everyone including you right? that is why you are reading this.
If you want to know more about it, let me know at mavadia.jitendra@gmail.com
Comment by Jitendra — March 1, 2011 @ 10:46 am
Hi… how is the general package of facbook ad package costs ? and is there anyone can share with me the number of true response which actually translated to sales after being advertised by facebook adv… in terms of transaction and its dollar value… ?
Thanks for the help in advance!
Barry
Comment by Barry Chan — March 5, 2011 @ 3:43 am
So, I just wait and see ????
Comment by Barry Chan — March 5, 2011 @ 3:44 am
Great post Nick O'Neill
Facebook ads is fast outsmarting and replacing Google ads – Adword (Main Google Revenue Source)
I have a detailed post on facebook revenue source, the may facebook revenue secrets here.
http://nigeriabestblog.com/top-best-google-adsens...
Its explain the three main secrets of facebook income.
Comment by jerrywhyte — August 3, 2011 @ 2:24 pm
Thanks for the information. Now everybody knows hoe facebook makes money by giving free entry to facebook. Facebook is making money by using us.This has become old now.
Now the BIG NEWS is that we can get paid. Click http://tinyurl.com/3ncphzh to register. Once you register, please write a mail to me at rangaswamy.blr@gmail.com, I will give more details.
Comment by Rangaswamy — September 6, 2011 @ 1:05 am
omg ya like. does he reaaly not no how much hes hurting her?? he should move on and get his ma out of the home cause like thats bad owl form
Comment by TomasG — September 6, 2011 @ 10:22 am
nice
Comment by m.m — September 20, 2011 @ 8:31 pm
If it's a bubble. What if it burst? Will the damages go into the social life?
Comment by Sussy — September 29, 2011 @ 12:47 pm
still wonder how Facebook makes money?
Comment by Swati Aggarwal — September 29, 2011 @ 4:39 pm
I agree with what you are saying. But I didn't see anything about facebook fanpages. I have been using them for a while now. I actually am giving away a free ebook that shows your visitors how to make money with facebook fanpages the easiest way possible. Anyway, your post is great, good info, but I just wanted to touch on facebook fanpages!
Thanks
Comment by Mitch Hell — November 7, 2011 @ 12:34 pm
main way: companies pay facebook to display their ads on facebook, (with so many users on facebook its a good way to get your ad in front of a lot of potential customers)
Comment by jaclyn — November 12, 2011 @ 10:50 am
got know how facebook makes maney
Comment by sayjal yadav — November 12, 2011 @ 12:42 pm
can some1 tell me how facebook makes money i need the answer
Comment by guest — November 18, 2011 @ 6:56 am
nah they make their money from selling emails and peoples info (for ad Targeting) i signed up to facebook using a throw away email and boy did i get spammed!!
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Comment by koltin — December 19, 2011 @ 11:36 pm