Meta Business Model – How Facebook Makes Money?

Meta Business Model – How Facebook Makes Money?

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Updated on Mar 11, 2022 17:20 IST

Let’s explore Facebook’s revenue business model in detail to understand how the social media giant works and where its money comes from.

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Meta (Facebook) is a popular global social networking platform that allows users to sign-up for free profiles, connect with people, share photographs, post comments, and do a lot more. Meta makes a lot of money. But how? Where does its revenue come from? In this blog, you will learn about the Facebook business model. We’ll cover how Meta (Facebook) works, how Facebook makes money, and get insight into its product line.

Table of Contents

How Facebook (Meta) Started?

Facebook is a social networking site that makes it easy for users to connect with family and friends online. It was founded in 2004 by Mark Zuckerberg, along with Eduardo Saverin, Dustin Moskovitz, and Chris Hughes, who were students at Harvard University. The idea was to create a place that could help college students connect with each other.

Now, Facebook has become the largest social network in the world, with nearly three billion users as of 2021 with nearly half that number using Facebook every day. Facebook rebranded itself to Meta Platforms Inc. in October 2021.

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Meta’s (Facebook) Product Line

Before moving on to Meta’s Revenue Model, let us first take a look at the products and services owned by Meta. The following are the products that Meta offers:

Meta/Facebook (mobile app and in-app browser)

This platform enables people across the globe to connect, share, and communicate with each other using smartphones and PCs.

Instagram

It is a platform that allows people to share photos, videos, and exchange messages. Instagram users can also shop from different businesses that run advertisements on this platform through Instagram Feed, Lives, Stories, Reels, IGTV, and messaging.

Facebook Messenger

It is a messaging application that enables people to connect with friends, family, groups, and businesses through chat, video calling, and rooms.

WhatsApp

It is a messaging application where people and businesses across the globe can communicate securely and privately.

Some other products offered by Meta include:

  • Meta View
  • Oculus Products
  • Portal-branded devices
  • Spark AR
  • Shops
  • Meta Audience Network
  • NPE Team apps
  • Meta Business Tools

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How Does Facebook Make Money?

As per Statista, in 2021, Meta (formerly Facebook Inc) generated around 117 billion US dollars revenue, up from around 86 billion US dollars in the previous fiscal year.

Facebook’s monthly active users as of the fourth quarter of 2021 were around 2.91 billion. But the company does not make any money directly through its user base.

Now you must be wondering how the company makes such a large amount of money. Well… the social networking giant makes most of its money by showing ads on the social media and messaging platforms it owns, i.e. Facebook, Facebook Messenger, Instagram, and WhatsApp.

How Facebook Makes Money from Advertising?

Advertisers pay Facebook to make their ads visible to users. But they do not get access to private user information. Advertisers can choose to “target” the ads. This way, they can show the ads only to people who match some characteristics, such as gender, age, country, ethnicity, interests, etc.

Advertisers choose the target and then Facebook projects the ads to the right people based on automated computer algorithms.

Facebook has access to billions of people around the world who can buy different products or services. This is exactly what sellers want.

For instance, if a business wants to target males of the 28-34 age group living in California, the business would have to spend a lot of money and resources to perform research by reaching out to everyone in that target area. But Facebook can enable businesses to reach the exact target group easily.

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Facebook has all the data related to what content we consume, whom we connect with, pages we visit, and the posts that react to, etc. Based on this data, Meta’s algorithms categorize user profiles for audience targeting. The company uses machine learning algorithms to analyze users’ profiles, their interests, their current friends, and more to provide personalized ads that maximize value for both users and businesses.

So, Meta makes most of its money by auctioning space for ads in its Facebook and Instagram feeds and stories. Now let’s take a look at the breakdown of how Facebook makes money and an explanation of Facebook’s business model.

Facebook Business Model Explained

  • Facebook allows its users to signup for its social media apps for free.
  • It charges advertisers to display ads to targeted groups of users that fit certain characteristics.
  • Advertisers can display their advertisements across Facebook’s family of apps and services.
  • Ads on Facebook are priced based on an auction system where advertisers compete with each other.
  • The auction system considers various factors like how often users will click on ads. It is designed in a way that it prefers ads that will make the most money for Facebook.
  • So, the businesses running ads will only be charged for the number of clicks or the number of impressions the ad received. Impressions refer to the number of times the ad is shown, even if no one clicks on it.
  • Facebook also provides a detailed performance tracker. It shows how different campaigns and different types of visuals work. It helps businesses to understand what type of campaigns and for what type of users work best.
  • Businesses that want to display their ads can set a maximum budget. They are charged based on the ad performance.
  • It also shares its advertising revenue with video creators who upload short videos or image ads in qualifying videos on Facebook Watch or Instagram TV (IGTV).
  • Facebook displays ads on its platforms – Facebook, Facebook Messenger, and Instagram.
  • Most of Facebook’s advertising revenue comes from Facebook and Instagram.
  • Facebook Messenger is a small contributor to its advertising revenue.
  • Currently, ads are not displayed on WhatsApp.
  • In a nutshell, advertising accounts for a majority of Facebook’s revenue.

How Does Facebook Ads Auction Process Work?

The Facebook ads auction process is not based on the highest monetary bids. Instead, it depends on the value created by the ad for the targeted users. This is because Meta is focused on providing a useful, positive, and relevant experience to all of its users.

The value created by every ad is decided by considering the following:

  • Advertiser bid: It represents how interested a business is in showing its ad. (what the advertiser is willing to pay to gain the desired results)
  • Ad quality and relevance: According to Facebook, how interested a user will be in seeing your ad. This takes into consideration various factors, such as feedback from people viewing or hiding the ad, etc.
  • Estimated action rates: How likely a user will take the action you are optimizing for with your ad. For instance, how likely a user will download your app or visit your website.
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Other Ways How Facebook Makes Money

In 2020, nearly 97.9 percent of Facebook’s revenue was generated from advertising. The company makes only around 2% of revenue from its non-advertising business (payments and other fees revenue).

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Here are some other ways through which Meta makes money:

Oculus

Meta Oculus are VR headsets that enable people to defy distance and connect, play, and work with the world around them. These headsets are currently redefining digital gaming and entertainment spaces. Oculus accounts for the majority of share in the 2% of Meta’s non-advertising revenue.

Portal-branded Devices

Portal-branded Devices are a small part of the Meta hardware business. The video-calling devices of the Portal family allow people to feel connected with their families and friends located at different places across the globe. In 2019, nearly 1 million Portal devices were sold.

Spark AR

Spark AR enables content creators to develop, test, and publish immersive augmented reality experiences for people using Meta’s family of apps and devices.

Facebook Pay

Facebook Pay allows users to send money simply and securely on Facebook Messenger and WhatsApp. You can send money to friends, buy from businesses, and donate to fundraisers on Meta’s family of apps.

Workplace by Facebook

Facebook’s Workplace service enables businesses to manage their internal communications just like Slack and Microsoft Teams. While this service has a free subscription option, its advanced service costs $4 for each user per month.

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Bottom Line

In this blog, we learned that Meta primarily makes money by selling advertising space on its various social media platforms. The company offers other products as well, in addition to its social media platform. However, the contribution from other revenue sources is very small as compared to that of advertising.

Now with its recent change in name (Facebook to Meta) and refocusing its strategy on building the metaverse, we can expect the company to come up with other revenue sources soon. In the future, it could make money by selling virtual goods in the metaverse along with advertising and other virtual experiences.

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