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Chapter 8 Social Media Information Systems
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Revenue Models for Social Media
The two most common ways SM companies generate revenue are advertising and charging for
premium services. On Facebook, for example, creating a company page is free, but Facebook
charges a fee to advertise to communities that “like” that page.

Advertising
Most SM companies earn revenue through advertising. Facebook made 94 percent of its 2015
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first quarter earnings ($3.5B) from advertising. About 90 percent of Twitter’s $436M first
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quarter earnings came from advertising as well. Advertising on SM can come in the form of
paid search, display or banner ads, mobile ads, classifieds, or digital video ads.
Google led the way in making digital advertising revenue with search, followed by Gmail and
then YouTube. Today, it doesn’t seem like any great insight to realize that if someone is searching
for information about an Audi A5 Cabriolet, then that person may be interested in ads from local
Audi dealers and BMW and Mercedes dealers as well. Or if someone is watching a soccer game on
YouTube, maybe he or she likes soccer? While not mind-boggling to imagine, Google was the first
to turn this notion into substantial revenue streams. Other tech companies followed.
Advertisers like digital ads because, unlike traditional media such as newspapers, users
can respond directly to Web ads by clicking on them. Run an ad in the print version of The Wall
Street Journal, and you have no idea of who responds to that ad and how strongly. But place an
ad for that same product in the newspaper’s online version, and you’ll soon know the percent-
age of viewers who clicked that ad and what action they took next. This knowledge led to the
pay-per-click revenue model, in which advertisers display ads to potential customers for free
and pay only when the customer clicks.
Another way to grow ad revenue is to increase site value with user contributions. The term
use increases value means the more people use a site, the more value it has, and the more people
will visit. Furthermore, the more value a site has, the more existing users will return. This phe-
nomenon led to user comments and reviews, blogging, and, within a few years, social media. If
you can get people to connect their community of practice to a site, you will get more users, they
will add more value, existing users will return more frequently, and, all things considered, the
more ad clicks there will be.

Freemium
The freemium revenue model offers users a basic service for free and then charges a premium
for upgrades or advanced features. LinkedIn earns part of its revenue by selling upgrades to its
standard SaaS (Software as a Service) product. As of May 2015, regular users access LinkedIn
for free; individual upgrades range from $29 to $79 a month and offer advanced search capa-
bilities, greater visibility of user profiles, and more direct email messages to LinkedIn users
outside one’s network. Businesses that want to use LinkedIn for recruiting can purchase a
Recruiter Corporate account for $120 to $750 a month. LinkedIn’s revenue consists of about
19 percent from premium subscriptions, 62 percent from online recruitment, and 19 percent
from advertising. 20
By diversifying its revenue streams, LinkedIn has reduced its dependence on fluctuating ad
revenue and lessened the negative impact of ad-blocking software. A recent report by PageFair
indicated that 27.6 percent of Web surfers use ad-blocking software to filter out advertising
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content and rarely, if ever, see Internet ads. It also reported that the use of ad-blocking soft-
ware grew by 69 percent over the past year. SM companies that rely solely on ad revenue may
see their share prices plummet if the use of ad-blocking software becomes widespread.
Other ways of generating revenue on SM sites include the sale of apps and virtual goods,
affiliate commissions, and donations. In 2012 Facebook generated more than $810M in