Show Me the Money Social Networks

by Azuela

Today, nobody has yet found the holy grail of making money out of social networks.  Most of the money made has gone to investors and founders that closed great deals with Microsoft, Google, News Corporation, Ebay and other big players.  Now the challenge is how to set pricing, and of course how to make a profit, using social media including Facebook, You Tube, My Space, Skype and other sites.

Social Networks need to “show us the money” the old fashioned way through the creation of operating cash flow in the bank.  It’s an important distinction: I’m talking about the “checking account”, not accounts receivable.  In banker talk I mean EBITDA (Earnings before interest, taxes, depreciation and amortization) + working capital adjustments (in brief making the customers pay us fast).  For the entrepreneur, it’s the cash that makes it from the daily cash register to the company checking account.

In general, businesses make money in three ways: through a fixed fee paid for a determined period (eg. monthly); through a commission or performance fee; or through the usage of a service prearranged before the service is given (eg. banner impressions in the online world).  The fourth way is infinite, depending on the imagination of the company setting up prices through retainer, performance or usage.
Social networks have experimented with all these money-making flavors and their multiple  combinations, but nobody has discovered a sweet spot like Google did a few years ago by introducing the Pay per Click concept.  Here are some of the pros and cons of the three pricing schemes applied to social networks.

Retainer.  This pricing schedule is currently charged by many social networks to big accounts, either by giving them the right to  a presence on a social property or bundled with many other advertising services such as print and television.  This pricing scheme it is a great source of sustained and predictable cash flow, but it doesn’t bring big dollars, thereby reducing the valuation of the company.
Performance.  For Google, the pay per click or pay for performance was the tipping point that built the cash generating engine that it is today.  For search engines it seems to have worked for the Gorilla of the sector but for the second, third and subsequent levels it has not generated cash. Facebook tried to implement a similar performance pricing through Beacon, which back fired due to confidentiality issues with the communities and not paying attention to the fine details of execution.

Usage.  One example is the traditional method of charging for online media, the famous “banner”.  Cost per 1,000 impressions is the norm.  If you are a solid and visited online asset this strategy gives cash flow and predictability in portals and niche websites.  So far, social networking has shown that the banner strategy is not a source of value. Marketers will only pay low prices because communities do not pay attention to banners, and often resent them.

In my mind the holy grail of social networking pricing is in a combination or permutation of the three strategies.  If you have an idea of how to get there, please share it with us! We promise we will keep it a secret …..