Everyone knows that social media companies make money from advertisements.
But how exactly does that work. Do ads effect how social media companies are run? How do ads affect the user experience? And how are social media companies making money by collecting its users data?
I’m not anti-social media. Social media has done an incredible job leveraging the internet and connecting the world like never-before in human history. But that has also given corporate advertisers unlimited access to new data metrics and marketplaces.
In this article we’ll examine all the ways social media companies make money, optimize revenue, and what all of that means for you and everyone else.
Let’s Take A Look.
How Do Social (Digital) Media Companies Make Money?
When we’re talking about social media, by-in-large, we’re talking about a select few companies who all compete in the “attention economy”. It’s called the “attention economy” because all social media companies are competing, to capture user attention.
Under its “corporate umbrella”, Meta is the biggest social media company in the world. Meta owns the social media companies Facebook, Instagram, Messenger, and What’s App. While Twitter, Reddit, Tic-Tok, LinkedIn, Snapchat, and YouTube all compete for market share.
1. Making Money Through Display Advertising
Display advertising is, by far, the main source of income for social media companies. “Display advertisements” are usually photo or video ads that are displayed with-in the social media platform.
Having run social media ads personally for myself, I have a decent understanding how they work. Individual business, companies, and corporations pay social media companies large sums of money to show their ads to social media users.
What makes social media advertising so effective is the ability to target very specific audiences with very specific ads. For example, If you’re a company that sells hats, you can choose to only show your ad to social media users who interacted on the Facebook page for “male baldness”.
Or if you’re selling yoga mats, you can specifically target social media users who “liked” pages that relate to yoga. Social media companies save this type of data on every user and provide it to advertisers to make advertisements more targeted and effective (profitable).
This type of specific targeting can be a very efficient, and effective way for individual companies to spend advertising dollars. And the more effective advertising is, the more the company will spend on advertising. And the more a company spends on advertising, the more revenue the advertising platform (social media companies) will make.
From the perspective of the investing experts at Investopedia…,
“Advertising isn’t just a way to perhaps earn a little bit of revenue in between hosting family photos and personal musings. It’s the very purpose of the site’s existence”
2. Sponsored Content
Sponsored content is very much like ‘display advertising’, except with a slightly different intent behind it.
Ads are ads, and most people can clearly tell the difference between an ad, and a family picture. The idea behind an ad is to get you to buy something. Some ads are less ‘pushy’ than others, and some ads are downright discrete or even disguised. But the overall goal behind an ad never changes.
Sponsored content, is slightly different in that its purpose might not be as overtly clear. For example, when “sponsoring” or “boosting” a news-article (or an ‘opinion post’) the intent behind the ‘sponsored content’ can be less about buying something, and more about persuading.
When it comes to social media ‘mis-information’, ‘dis-information’, and fake news, sponsored content can be a useful tool. For example, you can pay to ‘sponsor’ or ‘boost’ a certain article, and show that article to millions of people on social media in an effort to persuade them to think one way or another.
It is well known that most people only read headlines (in fact over 80% only read headlines according to studies). So by ‘sponsoring’ a specific news article (whether true or not), if that article has a catchy headline, you can influence a massive amount of ‘specifically targeted’ people.
Sponsored content brings in less revenue for social media companies than display advertising, but it is an effective revenue stream never the less.
3. Subscriptions And Premium Memberships
Most social media companies rely mostly on advertising revenue in order to keep their app or service “free”, there are some companies who offer “premium” paid memberships in exchange for an ‘ad free’ experience.
By paying for the service (or subscription, or app) you are then providing the social media platform a form of “monetary compensation” to make up for the “lost revenue” they would lose by not showing you ads.
For example, Spotify premium, YouTube premium, and Twitter Blue.
4. Transaction Fees / Upcharges
Although only a small piece of the ‘revenue pie’ social media companies do have an assortment of ‘fees’ and upcharges. Some examples are membership fees, transaction fees, seller fees (for marketplace), verification fees, and application fees for app developers.
Certainly not a large chunk of revenue, but fees are worth mentioning as social media has billions of users, so fees (although minimal) do add up to millions of dollars.
5. User Data Mining / Harvesting Personal Data
‘User data’ and ‘user privacy’ have come to the forefront of social media concerns in the recent years. But for the first 10 years that social media was around, personal user data wasn’t even a thought in the typical social media users’ minds.
Every click, every like, every share, time spent on certain pages, scroll time, purchase behavior, and more. This type of data has been, and still is, being collected from millions of people everyday. So how is this data being used ?
As we discussed above, some of it is being used by advertisers to understand what time, to show what ads, to what people, in order to optimize advertising dollars and results.
BUT, social media companies also bundle and sell user data in bulk. Selling data makes somewhere around 13% of Twitter’s overall revenue.
What does selling data mean exactly?
Social media companies aren’t selling “identifiable information” such as email addresses, phone numbers, home addresses, ect. They sell anonymous “aggregate data” in bulk to analytic companies. For example, which states like what pages the most. Or which types of tweets are most shared in which counties.
You could see how this type of aggregate data could be useful for both political and business purposes.
Facebook (Meta), google, twitter, tic-tok, ect…, they all do it.
6. Venture Capital
Venture capital is NOT a way for social media companies to make revenue directly. But venture capital is a way for social media companies to get “start-up” investment money until the company becomes profitable on its own.
Venture capital (VC) is when a private investor invests money (to grow a company faster) in return for a share of the business. The idea is that they (the venture capitalist) make their money back (and more) when the business grows larger and becomes profitable.
Optimizing Social Media Revenue With “Surveillance Capitalism”
The primary business model of social media companies is to offer their service (app) for free as a means of growing their user base, while making money on the ‘backend’ by selling advertisement space.
But by collecting user data, social media companies can offer their clients (the companies that are paying for ads) laser targeted audiences, which make their ads more effective.
As compared to a TV media advertisement, where your audience could be a random bunch of 12 million people…, social media offers ‘direct targeting’ of 12 million exclusive people who like both cats and John Deere.
The term “surveillance capitalism” is used to describe how social media companies “surveil their users” and take large data sets (aggregate data) which they then use to tweak their algorithms to make ads more effective (profitable).
More effective ads, means more ad dollars spend by advertisers, which means more revenue and higher share prices.
From the perspective of social media expert Maggie Clarendon, surveillance capitalism is when platforms provide “free” services in exchange to monitor the behavior of users.
In the defense of social media companies, some of this data is used to improve services, but the vast majority is translated into advertising information. Harvard professor Dr. Shoshana Zuboff calls this the economy of “prediction products”.
Basically this data is used to ‘predict’ how a consumer will act, and ultimately what they’ll buy next.
Essentially, Dr. Zuboff believes that customers now package and sell themselves, with no part of the profit from their own data.
Social Media Algorithms. What Exactly Is An Algorithm ?
Social media algorithms have been the ‘talk of the town’ the last few years. But what exactly is an algorithm? And how do social media algorithms work ?
In a mathematical sense, the Dictionary defines an algorithm as “a set of rules to be followed in calculations by a computer.”
A simple example of a basic algorithm we all know is the ‘pop-up ad’. Having run pop-up ads myself, I understand that you can easily create a “rule” to show pop-up ads to new visitors on a website after 15 seconds and then is they subscribe to automatically send them a ‘welcome email’.
This is a very simple example of an algorithm.
How Do Social Media Algorithms Work ?
With social media companies, the algorithms are very complex, and are engineered to calculate exactly what post to show you when. For example, is it best to show you an ad after 5 friend posts, or is it best to show you an ad after your mom’s posts.
Is it best to show you 13 ads every 100 posts or 20 ads for every 100 posts.
Or will you use the platform for longer if you don’t see any ads for the first 3 minutes and then see an ad that’s relevant to your google search from yesterday.
Social media algorithms are designed to balance “optimizing user engagement” vs. “optimizing revenue”.
Too many ads and people will get annoyed, too little ads and revenue will be ‘left on the table’.
These algorithms use millions of dollars of both user data, and user psychology. This data is leveraged to design the optimal balance between user engagement (attention on the platform) and ad revenue.
Is Optimizing The Algorithm For ‘User Engagement’ Good or Bad ?
Whenever someone logs into a social media platform, they are shown a ‘feed’ with posts and information that is specifically tailored their specific user profile. What you see on social is different than what everyone else is seeing.
Obviously there are some ‘viral posts’ that get spread around but there can also be pockets of ‘isolated content’ that only get propagated for certain users depending on their social media use history.
Social media is a tool. And when used as a tool to connect people and facilitate ideas it’s a very useful tool. But when social send you notifications, and email reminders, and updates, ect reminding you to log it and engage with your friends, it becomes more than a tool, it becomes a ‘needy friend’ looking for a fix of user data.
A tape measure is also a helpful tool when you need it. But your tape measure doesn’t send you notifications prompting you to use it when you’re doing something else.
Because your tape doesn’t make money when you use it. Social media does.
Being Conscious of Social Media Use
Being conscious of your social media use is as critical as being self-aware of how much alcohol you drink. Social media can be just as addicting as many drugs, and its our responsibility to be aware of that.
But, Social Media is not all bad, just like having a beer after work isn’t bad. But 2 hours of social media a day is not good for your mental health, just like drinking a six pack everyday isn’t good for health.
Awareness and moderation is the key.
As long as you’re conscious to the pitfalls of social media, for example, getting sucked into political debates, thinking Instagram photos are ‘real life’ examples, or simply scrolling through infinity. As long as you’re able to avoid these pitfalls then you’re on your way to being a more conscious social media user.
We value human connections and, in the end, most humans value the same things. Social media focuses on debates and negative traits, but we need to be consciously aware that humans have more in common that we do apart.
Final Thoughts: How Social Media Companies Make Money
Social media companies are “free” tools for instantly connecting people, sharing ideas, and transferring knowledge. In order to provide these services for ‘free’ to their users the social media companies sell advertising space to make up the bulk of their revenue stream.
But just like any tool, it can be mis-used.
You can use a hammer to build a ‘Habitat for Humanity’ house, or Colonel Mustard can use a hammer to kill some in the Library.
Ultimately advertising has been on radio, TV, and now social media, so it’s not going away. But, it harvesting user data to make advertising more psychologically potent really in the best interest of the ‘typical social media user’ or is leveraging user data for optimizing algorithms more harmful to society and leading to internet addiction.
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