How do social networking sites make money?

Social networking sites seem to dominate the Web. How often do you find yourself updating your status on Facebook, sending out a tweet on Twitter or adding new images to your MySpace page? Many social networking sites allow users to create profiles for free. But have you ever wondered how these sites made enough money to support millions of users?

One way social networking sites manage to make money is through investments from venture capitalists. These investors are essentially making a bet that the site they're investing in will become popular and will eventually find a way to monetize that success. Getting in early can mean a huge payoff down the road. There are several examples of large corporations buying out Internet startup companies for millions -- or even billions -- of dollars.

Between the dot-com bubble burst in 2000 and the economic recession that began in late 2007, venture capitalism was booming. It was fairly common for entrepreneurs to pool money and invest in promising Internet companies. Without these investors, services like Twitter would have withered away under operational costs. But as the economic recession set in, venture capitalism began to slow down. People are still investing in promising companies, but they're a little more picky about their choices now.

The problem with depending upon venture capitalists is that as time goes on, you have to find ways to raise more capital. There's no steady stream of revenue coming in to fuel the company. You may raise millions of dollars during each round of financing, but that money eventually runs out. Oddly enough, it runs out even faster as demand increases and your service or site becomes more popular.

Eventually, social networking sites have to hope for one of two outcomes: Find a way to make money or convince a larger company to buy the site. Assuming the social networking site's founders want to maintain control over their creation, the only real choice is to find a way to make money. We'll look into a few of the more common methods in the next section.

Advertising and Fees

The most common way for Web sites to generate revenue is to allow companies to advertise on the site. It may be hard to believe, but Web advertising is still an emerging market. Marketing experts are continuously trying to find the best way to insert advertising into the Web experience without impacting users in a negative way.

In general, the more popular the Web site, the more money it will be able to generate through advertising. A social networking site like Facebook has millions of active users. Access to that enormous user base is a valuable commodity. For that reason, advertisers might be willing to pay more for an ad on Facebook than for a comparable ad on a smaller social networking site.

Another tactic is to charge a membership fee to users. While most social networking sites avoid this strategy, a few have been able to use it effectively. Many online dating sites withhold key features from users until they choose to upgrade to a premium account. For example, you might be allowed to browse for a potential match on a dating service, but you'd have to upgrade if you wanted to send your soul-mate-to-be a message.

For social networking sites that incorporate applications and services into the community, a developer fee can help generate revenue. While Facebook allows developers to create applications and incorporate them into Facebook for free, the site has an optional verification program that requires developers to pay a fee to participate. For $375, Facebook will evaluate a developer's application. If the application meets Facebook's standards, Facebook will list it as a verified application. This means Facebook will feature the application prominently over apps that haven't been verified.

We may see other business models emerge as social networking sites continue to grow and become more integral to the average user's Web experience. Other strategies could include, for example, special premium accounts for businesses. The businesses could then leverage the social networking site as an advertising platform. In fact, the founders of Twitter have discussed a business model that would require companies to pay a verification fee to have an official company Twitter account. But whether these strategies will pan out or not remains to be seen.

It seems clear that social networking sites are here to stay. Millions of people use them, and developers create applications that depend upon these sites. But ultimately they'll need to generate revenue if they're going to stick around.

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How do social networking sites make money?

Advertising and Fees

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