We have gone over the basics on how Facebook rose to power as a large social network. How does Facebook profit? As we all know, Facebook is a free service, but it also has a market revenue of over 300 million.

How does Facebook profit?

1. Facebook uses advertising to profit. Pretty obvious, isn’t it? Facebook is a free service, they can’t profit from users.
2. Facebook targets advertisements based on a user’s actions. For example, the only application that I have added on Facebook is Last.fm, so I get advertisements like Do you know AC/DC? or Do you know Nirvana? (both bands that I have on my Last.fm). This, to some, may be considered an invasion of privacy. I don’t think so. If you are posting information about yourself to Facebook, they have the right to share that information with advertisers. The sharing of information with advertisers helps everyone. Advertising companies will pay Facebook more money because their ads are targeted very well and will get more clicks. This helps the advertising companies and Facebook themselves. It helps the user because, although some may disagree, they may actually get something from well-targeted advertisements.
3. Facebook sells virtual items in their marketplace. These items are about $1 each. I don’t really know how much they actually make from these, but the items are available in groups of 100k, 250k, and up to 1 Million. This is probably a good little bit of profit.
4. Facebook sells information. This might be hard to believe for some, or extremely easy for others, but it is true. There are multiple sources saying that this happens, and overall it is likely. Facebook is a commercial company, so they do do something with the information that you type in.

What you can learn from this

Facebook isn’t profitting as much as it should be. With over 140 million active users, it should be one of the richest companies on the web. Instead, Facebook might actually be losing money.

1. Facebook is targeted at college kids and teenagers. The consumer power of these demographics is next to nothing compared to targeting middle aged people. Users of Facebook don’t even have to have a source of income – they can join at 13 – expect for what their parents provide to them. This hurts Facebook.
2. Clicking advertisements is old business. As the new generation is coming in, they click ads less and focus on the content more. This is partly because they are using the web more, so they know what to click and not to click, and partly because the content is different. Why would you click an advertisment when you can click on a picture of your friend chugging a beer?
3. Facebook does too much. This takes away from advertising. If you have everything on a website like Facebook, why would you need to click an advertisement and go somewhere else? This is an upcoming problem with Web 2.0. If you have large websites with many features, the necessity of advertising will go away because users will find no need to leave the current site that they are on.

Although Facebook isn’t doing the best right now, they are still a social networking powerhouse. With over 140 million active users, they might count in millions what you would count in tens on your website. Try to imitate Facebook in your website – at least in some features – but perfect what it does wrong.