Innovation & Design

Profiting from Social Networking


Users at social network Facebook are exploring software applications by outside developers, but the question remains: How do you make money from them?

Here are two potentially billion-dollar questions: How can you turn the Web's social-network users into consumers? And how can you turn idle browsing into a flourishing bottom line? Back in May, marketers hoped they might have the answer when social-networking giant Facebook opened its network to external developers. This instantly allowed them potential direct access to a user group of millions who are notoriously unimpressed by traditional advertising methods. The only challenge: developing real-world applications that users might want to embed in their profiles, which would have a real-world effect beyond mere entertainment.

Three months later, it's clear that there's no foolproof formula for success. Companies categorize their own applications from a list of 22 options and, as such, "businesses" come from across the board. In fact, the most popular "business" listing is Total Sports Fan, a sports application run by Boris Silver, a Wharton School student who has no plans to exploit the app as a business. In fact, he says, he listed it in that category because "he just kind of wanted to." This free-and-easy attitude is all part of the territory, and other, more serious-minded ventures need to not only understand this attitude but be willing to live with it.

Know Your Audience

Four of the most popular applications within the category include the virtual trading program Fantasy Stock Exchange, a recruitment specialist called Jobster Career Networking, an environmental activist app known as I am Green, and a person-to-person loan service called the Lending Club, which has what may be the most successful business model. Though they've attracted 174,000 users among them to date, capitalizing on those users is still a challenge. Here, we assess what they're doing right, analyze what they could be doing better, and determine what their stories can teach other companies that want to enter the space.

First: This is Facebook, kids. Despite its exploding demographic, this is still a forum for the young: 56.4% of users are under 35, according to ComScore. Applications need to be appropriate and relevant to that audience. Those hoping to extract money from a Facebook user need to understand what's at the network's core. Kevin Rablois, vice-president for strategy at San Francisco-based Slide, the largest developer of Facebook applications, says there are two ways for a business application to grow: through exploiting its social side or by providing users with a means for self-expression.

The Fantasy Stock Exchange (FSX) application, sponsored by virtual stock trading site HedgeStop.com, is currently the second most popular business application, with 92,000 users signing up since its launch in early July. On the application, as on its mother site, users trade virtual money based on real-time figures provided by NYSE and NASDAQ. The application loads content directly from HedgeStop.com and the 18- to 35-year-old players using it represent a similar demographic to those already using the company's core Web site.

Getting Beyond Marketing

HedgeStop.com hopes to earn money by selling banner advertising space on its application pages, promoting the idea that virtual traders can be real spenders. But since Chief Executive Daniel Carroll admits that targeted users are "mostly beginners" who don't yet have real funds to trade, they are also unlikely to be big spenders. Not to mention that an old-fashioned ad business model rather misses the point of the forum. Young users are wary of potential manipulation, and may be turned off FSX altogether if advertising gets too intrusive. Finally, the application has yet to offer features unique to Facebook. There seems to be no reason users shouldn't simply go right to HedgeStop.com.

It's a common mistake, says Facebook Senior Platform Manager Dave Morin. According to him, too many companies still see applications as marketing rather than as new business. They bring users to an application either to advertise to them or to build a connection they hope will subsequently send users off Facebook and to their main business—a company Web site, say, or its online store. Instead, companies should be trying to make the application into a self-sustaining business that generates revenue through the service it provides on Facebook. "The applications that are the most successful are the ones that integrate seamlessly into Facebook," Morin says, a model that conveniently supports Facebook's own business ambitions.

A Business-to-Business Model

At the same time, most users expect Facebook to be entertaining and, well, free, so getting them to pay for an application directly is unlikely. Companies such as the career networking site Jobster.com are trying to get other businesses to pay for access to Facebook users.

On Jobster's Facebook application, called Jobster Career Networking, users post résumés and declare career goals. Jobster then feeds those résumés to companies such as Nike (NKE), GE (GE), and Merrill Lynch (MER), which pay a $100 monthly premium fee to access résumés from Facebook. That's in addition to the $300 they pay for résumés from the main Jobster.com database. It's a premium they're prepared to pay to access young workers with perhaps nontraditional backgrounds. "We aren't after the companies that want a classic job board," says Jobster's Vice-President for Corporate Communications Christian Anderson. In its first month on Facebook, Jobster Career Networking moved 300 companies from regular to premium membership and brought in 50 new partners, generating several hundred thousand dollars in revenue, according to Jobster CEO Jason Goldberg.

Given that Facebook is a social network whose main function is entertainment, there's a danger that job hunting may not be an activity users wish to load onto their profile, when they can do so just as well on Jobster.com or any other job search site. In fact, mixing business with pleasure is a concern for users who might not want their new boss hearing about their high jinks on vacation. This reality could provide a stumbling block for Jobster's latest feature, which enables users to add endorsements from Facebook friends to their résumé cover letters.

Rablois is skeptical of Jobster's plan. "Why would I want recommendations of my skills or a dedication posted along with drunken photographs?" he wonders. And won't employers disregard friends' recommendations as entirely, unashamedly biased?

Jobster's Anderson says users have expressed the same concern. "We've really had to work to clarify that companies won't see your profile, that you won't be 'friending' companies." Consequently, says Anderson, they won't be able to judge the friends you cite as references; they'll just know how many recommendations you have. But this means that Jobster Career Networking has to restrict its links to the social core of Facebook to function as a professional application. It's a risky strategy. Given that the application adds little to users' experience of Facebook, they might as well use Jobster.com or other recruitment sites. If users ultimately decide against linking their private and professional lives, companies will be quick to pull their support. For now, though, it's paying off: 52,000 users have downloaded the application since late July.

Showing a Green Side

I am Green lets users list simple environmentally conscious choices they make in their daily lives on their public Facebook profiles. On the application's main page, users can talk about green technology, organic produce, and environmental issues. Founder Karel Baloun, a former Facebook employee, plans to monetize his 27,494 users by selling advertising space and selling green products on manufacturers' behalf. Baloun says he'll avoid young users' hostility to advertising by providing content only from the green companies they already like and discuss on the application page and by polling them about the brands they'd like to see involved.

Slide's Rablois thinks this might work, because users committed to a niche cause might be eager to buy green products. Then again, potential sponsors might not pay much to participate in such a niche market. Like HedgeStop.com, Baloun is trying to bring an old media business model into a new media space.

Fees for Lending Service

The smallest of these four business applications may be the closest to developing the most appropriate business model. On Lending Club, a person-to-person lending company that launched via a Facebook application in May, the social component is at the center of its business model. Borrowers load the application to meet up with lenders from within their existing Facebook networks and social groups. They then negotiate rates directly. Once an agreement has been made, they head to LendingClub.com, based in Sunnyvale, Calif., to enter bank account details, so funds can be transferred directly between accounts. Lending Club takes a small cut, up to 3%, of each loan.

Says LendingClub CEO Renaud Laplanche, "Person-to-person lending works best in an a environment where people feel connected to one another, lending to friends and friends of friends." He also claims that peers trust peers to give better rates than a bank. So far, the site has attracted 13,163 users. With its 3% transaction fees, Laplanche estimates that by the end of August, the company will have moved $1 million since its June launch. But the revenue for the company in the same three-month interval is only $30,000. Given the minimal costs of maintaining the Web site and its relatively small staff of 21 people, this may be enough for now, but as the application grows, its infrastructure costs will expand. Raising the company's commission, however, would quickly jeopardize its value proposition to users.

Facebook, where users expect applications to augment their social experience with little effort and at no cost, may be a tough environment for companies whose ultimate goal is making a buck, especially since so many companies are still trying to work with traditional ad models. Ultimately, the most successful applications are those whose business model, brand identity, and natural users match the culture and demographic on the network. As such, the top applications may not provide plug-and-play solutions for every brand hoping to enter Facebook. But the lessons they teach about the need for authenticity and relevancy are universal tenets for marketers in the Web 2.0 age.

Click here to view examples of Facebook's applications.


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