Facebook business model

Everything You Need To Know About The Facebook Business Model

Khyati Hooda
By Khyati Hooda 10 Min Read

Facebook’s business model revolves around giving free tools and services to billions of users and generating money by allowing businesses to display advertisements to Facebook’s users. Facebook, Instagram, Messenger, and WhatsApp are some of the sites the company offers its users to connect them with family and friends. 

The company also provides an ecosystem that supports connections through augmented reality products such as Oculus virtual reality headsets. Meta competes with companies that sell advertising space and those that enable association by sharing content on user networks to create a metaverse-like effect. 

Meta competes primarily with other companies that offer advertising space or connections between people using their various social networking sites.

Major competitors include Apple Inc. (AAPL), Alphabet Inc.’s (GOOGL), Google and YouTube, Tencent Music Entertainment Group (TME), Amazon.com (AMZN), and Twitter Inc. (TWTR).

Facebook’s Business Model

Facebook’s priority is to grow its user base. However, this is only the first phase of the strategy. As a social media platform, Facebook has large amounts of data and has always used that data to generate revenue from targeted advertising. 

Since reaching saturation in demographics like the U.S. and Canada, the company has expanded its reach to other parts of the world that have limited smartphones with good internet connectivity or are not connected because there is no way to access Facebook – until now! 

Phase one will give these people without access to smartphones a chance.

Facebook’s main activities

Facebook has many different activities, such as web and app development. Data maintenance and security are essential parts of the operation. Another includes building partnerships with the development of new offerings, which includes projects, developing marketing software, etc., for brands that have been duly recognized for doing so.

One area invested in is protecting user data by investing in protecting information from hackers who want to steal it or use your personal information against you, whether financially or even physically. 

A recent acquisition was a Swedish mapping startup Mapillary, which built a street-level mapping platform using photos of citizens, which Facebook then acquired in the year 2018. The most important responsibility they have to worry about is compliance with government regulations, as this ensures that their business is not affected by jail sentences. 

Facebook’s other main activity also includes sustainability. Facebook undertakes a variety of activities to achieve its sustainability goals. It is investing heavily in green energy, reducing greenhouse gas emissions, and is now one of the world’s largest renewable energy buyers.

In 2019, 86% of Facebook’s operations were powered by renewable resources, up from 75% in 2018.

Value Proposition of Facebook 

For users: the most significant benefit is staying in touch with family and friends through text, photos, and interactions via comments or direct messages. This is especially important for those who often travel or live far away from loved ones.

Another advantage of Facebook is entertainment – it is useful both for those who want to entertain themselves by following the lives of acquaintances on Facebook and those who use it as a news source that provides information on current events.

For advertisers: The ability to run targeted campaigns that focus on their specific audience is of great value to brands. By better reaching their primary audience and connecting with people interested in their product or service, companies also get a better chance at higher sales.

Another relevant point that is especially valuable for small businesses or young companies is the fact that the tools for advertising on Facebook are pretty simple – as if they were doing it themselves – this reduces the need to hire someone else (which would be expensive) to manage the advertising content themselves effectively.

For developers: Facebook is a fantastic platform for developing apps and games and various other services. The social media giant offers developers both advertising services and unbiased reviews of its products.

Sources of Facebook’s spending 

We won’t be able to answer how Facebook makes money or the Facebook business model unless we know all of the company’s expenses.

Cost of revenue

The cost of revenue is the money Facebook spends to build and maintain its infrastructure. This includes expenses for the delivery and distribution of products, depreciation, and other costs. Cost of revenue also includes:

  • Facilities and server equipment and depreciation,
  • Energy or bandwidth costs, 
  • Support and Maintenance.

Research and Development

Facebook is the world’s number one social network. But that does not mean it has no competition and will always remain at the top of the list.

Facebook needs to put a lot more R&D into its processes if it wants to keep growing – and that makes it an expense that can continue to rise significantly in the coming quarters. 

R&D plays a big role in providing users with an improved experience with technology – something Facebook is sure to figure out soon, too! Facebook and its family businesses have had many competitors in this market, but they have successfully displaced them all thanks to their immense research and development (R & R&D) efforts.

Marketing and distribution costs

Facebook’s marketing and distribution costs include.

  • Spending on providing a better user interface and other services to attract new users, marketers, and developers.
  • Amortization of intangible assets
  • Salary and other employee benefit costs 
  • Other marketing expenses for people or products.

General and administrative

General and administrative expenses include administrative staff, other legal expenses, and accounting. This also includes compensation.

Facebook’s revenue system

To understand Facebook’s business model, we need to look into the company’s revenue system as well. 

Advertising revenue 

Facebook’s main revenue system is its advertising program. It generates 99% of its revenue from ads and will continue to follow this path. In Q3 2020, Facebook’s ad revenue was $21 billion, up 22% from the same period last year (Q3 2019).

Self-service advertising 

Facebook has a self-service advertising platform. Here, you can go to Facebook’s “Follow” page and create your own ad campaign that can then be served on sidebars such as events, groups, profile pages on Facebook. 

These ads are only displayed according to the target audience set by Facebook – they are broad in terms of age range and gender and rely heavily on restaurants, doctors, lawyers, and many small businesses or freelancers who use the self-service ad system to generate revenue for themselves.

Engagement ads 

In addition to self-service ads, Facebook also generates additional revenue as a part of its business model through “engagement ads.” These ads can be seen on the right side of the home page and are targeted at major advertising brands. 

Facebook is trying to attract more brand advertisers by working on new products like Brand Lift, which tests their ad campaigns for effectiveness against other platforms like social media competitors or native ad networks (e.g., Twitter). 

This product allows more advertisers to use Facebook as both a medium and a platform for campaign planning. They can use everything this service offers, such as video creatives with text overlays, carousel ads with swipeable images, and more.

Payment Revenues 

Payment revenue is the fees Facebook receives from developers or wholesalers for using Facebook’s payment infrastructure. Facebook charges a fee for all business transactions on its platform:

  • Bidding on the marketplace
  • Sales of digital products such as Zynga poker French fries 
  • Selling apps from developers. 
  • Money transfers to friends, and so on.

Sale of Oculus

Facebook sells Oculus’ virtual reality products and takes a small portion of the revenue from the sales. The company launched the Oculus Go in 2018 for $199, where the user’s smartphone provides the computing power and then launched an all-in-one headset called Quest for $399.

Conclusion

On the surface, there are a lot of controversies and accusations against Facebook. Even so, it is still booming. Whether or not you believe that this social network will end soon, one thing’s for sure: Facebook’s brand and business won’t be going away anytime soon. They’re investing in new approaches and brands as you may have noticed.

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Posted by Khyati Hooda
Khyati is an entrepreneur, marketing consultant and growth hacker. She helps sustainable revenue growth through marketing for SaaS and subscription companies. Her expertise lies in building scalable customer acquisition strategies and implementing effective digital marketing campaigns that drive high-quality, low-cost leads for startups. Khyati has managed over $50M in marketing budgets across various industries including technology, finance, education, retail, consumer goods and more - successfully delivering over 15x ROI for her clients.
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