Facebook Business Model – How does Facebook Make Money

It’s no wonder, Facebook is one of the most crowded social media sites on the earth. With more than 2.7 billion monthly active users over the world as of 2020, it’s no doubt that Facebook is raking billions. Moreover, around 400 new users sign up to use the site every minute.

Facebook is one of the Big four tech companies”, Apple, Amazon, Facebook and Alphabet, that owns other successful brands and companies. Hence, it is clear that Facebook is making good profits year-on-year. But do you wonder how exactly it works, what is its business model and how it makes money? If yes, this article is for you. Go on reading. This article walks you through interesting topics about Facebook.

Let’s first start with how this brilliant social media site works and know its features and products.

Products of Facebook

Facebook which was started with no intention to make business was founded by Mark Zuckerberg in 2004 in a dorm room.

The platform was built to help people connect and communicate with their family, friends and community. But no one thought it would become a great host for businesses to connect with their customers. In fact, Facebook users use this giant platform to verify brands.

This way Facebook has become a giant platform to communicate with anybody of their interest from anywhere in the world.

Facebook created its own eco system by launching its new products and features and acquiring other companies.

Its own products include Facebook mobile app, in-browser, Messenger, Instagram, Oculus VR. Not to mention about its features, Facebook keeps on upgrading itself with new features and user experience.

How Facebook Works?

So, now coming to how Facebook works, the platform has over 2.7 billion monthly active users and its product, Messenger has over 1.3 billion monthly active users. Despite owning multiple successful products, Facebook works in a quite simple way. 

  • It lets web users create accounts and use the platform either on a web browser or mobile app. 
  • Facebook lets its users access its innovative features such as Facebook groups, marketplace, events, Messenger, etc for free.
  • It introduced self-serve ad platform, where anybody can place ads on news feed, home, stories, etc

Features

Thus Facebook is a revolutionary website that totally transformed millennial’s lives (of course, adults and the elderly also use Facebook). At least 25% of the world’s population use Facebook. It’s features liking, commenting, sharing and messaging made people go more open on the platform. However, despite new features like IGTV, ads, Facebook has never compromised its core purpose of letting people connect with its community more smoothly.

Moreover, Facebook offers a great entertainment platform for its users with infinite scroll like Netflix is for binge-watch. There is no end for the content as there are a huge number of creators on the platform. In fact, this is how the company started making more money. With a billion audience-base, Facebook turned out to be a sweet spot for advertisers and businesses to promote their brands. And that is why you are seeing the ads on your feed today.

Okay, let’s see more about this in Facebook’s business model.

Facebook Business Model

As per stats, Facebook generated a total revenue of 18,687 millions with a Year-over-Year change of 10% as of 30th June, 2020. You will be surprised to know that of total revenue, over 98% is generated from advertising. 

However, this is not only the year that made the majority of revenue from ads. Its revenue has been increasing year over year since its 2009. It launched Facebook Ads in November 2007 for businesses to connect with their users and drive more customers to their business. 

In 2006, 2007 and 2008, it had experienced loss from $153 to $56. Only in 2009, it made a profit of $290 million on $777 million in revenue, Since then, it never looked back.

The social media giant had made brilliant acquisitions and mergers that only made profits for it. Today it owns a few profitable companies as mentioned in the first part of this article.

Facebook’s Revenue Streams

Thus, the company has multiple income streams to generate revenue. However, Facebook, though is transparent about its earnings, never disclosed how much it makes from each of its companies. Yet, it was stated that most of Facebook’s revenue (nearly 90%) comes from Instagram. Read about that in Instagram Business Model here.

Hence, Instagram is one of its genius acquisitions as it generates billions of revenue for its parent company, Facebook.

Despite all those, Facebook itself has its own business strategy to manage its expenses, that is advertising, which in turn is a strong income stream.

Introduced in 2007, Facebook Ads served millions of users and helped millions of businesses to grow and employ more people according to its founder, Mark.

Facebook makes money whenever a user clicks, views and scrolls through the ad.

It goes without saying that Facebook has created a great opportunity for small businesses to reach more and more people after Google. Because before Facebook and Google Ads, there were only television and newspapers ads that were unaffordable for small businesses. This way, the two social networking platforms, helped people a lot while creating their mark.

Enough said! Now, lets see how Facebook makes money with this business model. Shall we?

How does Facebook Make Money?

So, we are here at the most interesting part – how Facebook makes money.

Okay, it is pretty clear that Facebook makes money from advertising. Let us see how exactly it monetizes its space as an advertising platform.

As said, in 2007 Facebook introduced Facebook Ads. Meaning, it started selling its own space for advertisers to promote their brands. The ads include the purposes – brand awareness, making sales and launching new products. However, most of the ads are “pay-per-click”. It means, advertisers have to pay money for each click by users.

Advertisements

There are multiple ways the ads can be displayed on Facebook website and mobile app.

  • Photo Ads
  • Video Ads
  • Slideshow Ads
  • Dynamic product Ads
  • Carousel Ads
  • Instant Experience Ads
  • Story Ads

So, this is how this large social media platform makes money from ads.

User’s Data

There is a controversy that Facebook sells its user’s data. However, this is not true. 

Facebook doesn’t sell the user’s data though it owns huge data of its users. Yet it makes money by offering the data for advertisers for showing their ads to potential audiences.

Again, offering data for advertisers is truly for a good reason. This way advertisers can target their potential users and grow business without disturbing other users. Most importantly, it serves its users with related and relevant ads along with endless feed. This way Facebook users can get to know about their essential and necessary products and services for free without any effort.

Its Products

Facebook’s products, WhatsApp, Instagram, Oculus etc., have strong business strategies that bring billions of money to their parent company. As said there is no count of how much exactly these companies individually contribute to Facebook. However, as the companies are big brands and making profits, Facebook is making a good deal from those.

Other Revenue

Other revenue includes net fee charges from developers, revenue from hardware device sales etc.

How much does Facebook Make?

Now coming to how much Facebook makes, the platform generates 98% of its revenue from advertisements. Only 2% of revenue from other sources such as fees from developers, delivery of consumer hardware devices etc.

Facebook earned $18.3 billion in advertising revenue in Q2 2020 as per its reports. It even stated that its ad revenue grew by 10.2% in Q2 2020 compared to the Q2 2019.

It made $366 million in non-advertising revenue in Q2 2020. This revenue grew by 39.7% compared to Q2 2019.

Facebook’s Expenses

It paid nearly $2 billion for the U.S Federal Trade Commission as legal expenses related to data privacy issues. It also had to pay out $1.1 billion as a one-time tax expense.

Additionally, it incurred around $12,724 million total costs and expenses in 2020.

Thus, overall, Facebook’s net income in Q2 2020 is only 1.4% up compared to Q2 2018.

Key Challenges for Facebook

Like most other companies, Facebook didn’t go without challenges or criticism.

In July 2020, nearly 1000 companies and groups including CVS Health Corp., Coca-Cola Co. boycotted advertising on Facebook . It was to pressure the company to stop spreading misinformation, false and hate speech on the platform.

In March 2018, it was reported that a political consulting firm had accessed millions of user’s data illegally to influence voters to support Donald Trump during his campaign.

In October 2020, the House of Judiciary subcommittee on antitrust, after a 16-month investigation, reported that the big four companies Apple, Amazon, Alphabet and Facebook are dominating the industry.That, as a result affecting the U.S democracy, and economy.

Apart from all these, Facebook was not a single company to see downfall as a result of shutdown of the world due to pandemic.

Bottom Line

So, this is how the giant and incredible social networking site, Facebook, a synonym for binge-scrolling makes money. Hope you have got an idea of Facebook’s business model and how it works. Though it has powerful competitors such as Google whose major revenue model is also ads, Facebook with its large user-base keeps up its position as a profitable company. Again, as the company operates in a “hacker’s way” (meaning, it never hesitates to test and try things), it finds its own ways to make more profits.

Read: How does Google Make Money – Google Business Model

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