Primary Monetization Model for Social Media: Advertising
Posted by Nick O'Neill on August 19th, 2008 4:10 PMIf it wasn’t clear enough, advertising is the core source of revenue for all companies in the social web. As I wrote this morning, advertisers provide “the revenue for four out of the five primary types of companies in the social web economy”. In another article posted this morning on Alley Insider, Vasanth Sridharan revealed that RockYou will begin launching advertisements from car advertisers.
Car advertisers are some of the largest advertising spenders in the U.S. In the first quarter of 2008, General Motors spent $536.5 million, Toyota Motors spent $350.4 million and Ford Motors spent $330.2 million on advertising according to Nielsen Monitor-plus. The auto industry was also one of the first entrants into banner advertising and they are also one of the early entrants into social media.
What Matters More: Monetization or Users?
One of the classic statements in the social web industry is “our company is not currently focused on monetization”. The creators of technology products love to spend time focusing on refining their products while building the user base. In the early stage this makes a lot of sense because if only a few thousand users are coming to your site, it doesn’t really make much sense to try to generate revenue.
The strategy of “grow first, monetize later” seems to make sense for a lot of venture-backed companies because they have the luxury of time. Unfortunately though, I really don’t think these companies have as much time as they think. In a world of limitless inventory, investing the majority of a company’s resources in building more inventory doesn’t seem to make much sense.
Social Media Advertising is Nascent
This industry is still young though and advertisers are slowly (extremely slowly) beginning to understand what social media has to offer them. Spending money on a television advertisement does not generate as much interaction with your end consumer. As such we are seeing a number of creative ways to advertise in social media.
At the end of the day though, isn’t advertising just advertising? Advertisers want to invest money in promoting their products and services and they want some way of justifying their expenditures. Early on, social media campaigns provided little data in terms of return-on-equity (ROI). We are beginning to see that change though as new social analytics companies emerge and new forms of metrics generated.
It’s time for social media companies to invest more time in developing advertising solutions rather than their user base. Until someone comes up with a new way of making money through social media, it’s the only way to generate revenue.
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Our experience is that though advertisers are only slowly moving online, I would say that slowness is compared to internet speed, not traditional business speed, and moreover many many brand names are already heavily online and moving more dollars in that direction on a quarterly basis.
The pet industry is one of the slowest industries to change and yet almost all major pet food and products are advertising online. That was definitely not the case 2 years ago, but at this point there are very few that aren't spending advertising dollars online.
The fastest way to turn that new spending into your social sites revenue is to immediately take your ad sales inside, get direct ad buys and cut off the networks and the brokers. Yes, it costs something to build a sales team, but all the money that social sites lose by getting basement inventories when they could be getting 10x CPMs if they managed their own inventory and sales process astounds me. Why are PopSugar, Slide, RockYou all building their own sales teams? Because they've realized how much they are giving up letting someone else own their inventory.
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Ted Rheingold
Dogster.com/Catster
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You don't have to charge an arm and a leg for it...but let your advertisers know that you can give them a deal because you are just starting the site.
But then the question that web 2.0 companies ask themselves is...Does any form of advertising on a site starting off push away users from joining a site initially? I think that would be an interesting study to do on this blog...to see what people would say.
Because if the core user base was used to it from day 1...and were understanding that these sites HAVE to make money to stay in business...then wouldn't it make users more receptive to looking and clicking the ads?
Just my two sense...thoughts?
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However, I disagree that "building more inventory doesn’t seem to make much sense." That has to be qualified.
Building the SAME inventory as everybody else makes no sense but building QUALITY inventory that is different does.
Facebook has focused on users but it also has amazing amounts of data that can lead to behavioral targeting (all the rage now) or psychographic targeting, not just demographics or an assumed audience.
You are quite right that most web ventures are focused on creating more of the same inventory, hence the atrocious cpms they receive.
Quality always wins over Quantity
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Advertising is one of many ways to monetize social media. Take a look at Marriott's On The Move Blog where Bill Marriott was quoted on the NBC Nightly News that the blog is responsible for over $4M in incremental bookings. Also, many consumer companies are using the collection of community participation data (i.e. via profiles, content contributed, voting, tagging, etc) to create highly segmented marketing campaigns to consumers based on their behavior within the community. I have also worked with companies that are providing premium content and charging for access to these areas in their communities such as FindTechBlogs.com . Companies are getting quite creative with monetizing their social media communities.
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