Friday, April 3, 2009

Facebook monetization is a classic pricing strategy problem

I was reading an interesting article by Edmund Lee called Why Facebook Can't Succeed. There has been plenty of speculation and discussion about how Facebook will really make money. Even when we met with some Facebook bus dev and sales folks yesterday, they admitted they were still trying to figure things out and viewed themselves in start-up mode still.

My colleague Alisa Hansen, who blogs constantly about Facebook and how they should make money from their data, thought this author was off-base. Her response to the article:

So, “why Facebook can’t succeed”? Well, it has little to do with advertising....if they don’t succeed it will be because they fail to 1) admit to themselves publicly that they are in fact a database and 2) monetize like a database...i.e., sell data.

She also says: Facebook has never actually bent to their community’s will....they simply have been very good at making it seem as if they have, such as in recent TOS and redesign debates.

But, I found at least one piece of the article interesting.

He compares MySpace and Facebook in terms of their user experience and visibility of ads on their sites. MySpace has always been upfront about the placement of advertising on its site. Facebook started out (and still largely remains) uncluttered with ads. I never liked MySpace's user interface and found it too busy. I thought it was because I was too old. But at least, as a user, you knew what you were signing up for from the very beginning...that includes being exposed to ads, as well as other site features.

This notion of setting clear expectations upfront is also evident when you compare the websites of the Wall Street Journal and NY Times. The WSJ has always charged users for online access to the site, even on top of their print subscriptions. In fact, they are the pinnacle example and exception of a newspaper publisher that has not only survived the recent carnage of newspapers shutting down across the country, but they are making money on online subscriptions. This is part of the reason why Murdoch bought them last year. NY Times has tried to create a similar walled experience but couldn't and must rely on ad sales now for revenue. They may be doing better than other papers due to their loyal customer base, but almost every other paper has not been able to do what WSJ has done. And I attribute that to how WSJ never sought to give away the paper online and in fact tried to create additional value-added content on the web, such as more charts, data, blogs, and other features.

Bottom line is it is hard to charge for something once you give it away, especially if it leads to a major change in the user experience. My former marketing professor used to stress the importance of the "special introductory price" concept for pricing strategy. If you go out with a lower price than what consumers are willing to pay, you can never raise thr price on them easily. Of course, this excludes monopolies or oligopolies.

Look at cable companies, who have made this work. They have great promotions like Triple Play deals for new customers that revert back to a higher standard price in a few months. Along the way, they get you hooked by creating switching costs and creating the perception of a fair value exchange. One could argue that Facebook is exploring both too. It is not outright supporting data portability off Facebook (switching cost to bring your profile and friends elsewhere) and it's trying to increase the value of its network to users and marketers.

Facebook is not alone in this challenge. Look no further than other Web 2.0 rising star Twitter.

In the end, pricing strategy and monetization are 2 sides of the same coin.



  1. I would make one delineation though..MySpace is very much a content community, whereas Facebook is a communications therein lies another challenge for Facebook. How do you monetize communication?

  2. "it is hard to charge for something once you give it away" No truer words spoken! My firm subscribes to the WSJ and Financial Times and has scrapped the subscription of 45 physical print subscriptions. Those are the only 2 online subs we pay for. I know for a fact the firm will not pick up anything that is now free and goes pay nor will any of my coworkers that I have talked to.

  3. Alisa, how do you monetize communication? Phone companies and ISPs do it every day. Charge people for the pipe, right? I know this is different cuz the pipe is the Internet here. I wonder what would happen if start-ups explicitly gave people the first year access free to build adoption and then charged them later, as long as they were explicit about this upfront like my "special introductory offer" idea. Would sites like Facebook and Twitter have taken off? Or maybe after you reach certain number of friends? This is borrowing from the business model of Flickr and Picasa, which charge a premium for more storage than free accounts. I'm sure Facebook and Twitter are exploring all this kind of stuff!

  4. All valid points in the article & comments.

    Just one thing i would say is that potentially they businesses would look at creating options that make it more lucrative to pay for a more quality tool. i.e. no ads, better features, more control of pages; fre to design etc....