Week 4- Economics of Social Media

Social media’s primary purpose is to offer users ways to connect on a global scale. Additionally, it places at its users’ disposal a forum in which to share information with one another.  Given social media’s massive global reach, it has become an exceedingly profitable venue for companies to use not only for advertising and marketing purposes but also as a potentially lucrative investment.

When it comes to the economic side of social networking sites, the formula is quite simple: the more users a social networking site has, the more potential for profit both the site and the companies that advertise with it. This essentially makes the relationship between social media networks and companies a very symbiotic one, since each would benefit from having a relationship with one another.

A majority of social media users already have multiple accounts with different social networks, making it increasing difficult for new networks to appeal to users since they have already other long established accounts. The social media landscape continues to change on a daily basis –a result of the ever growing launch of new social websites and applications that further challenges those interested in developing a successful –in terms of number of users and the potential for profitability –fresh social networking sites. Given the inherent competitive market place already established within the social media realm, barriers to entry into that world become even more daunting.

It seems as though that in order for new social networking sites to garner a strong user base, such a site must have a certain concept and/or focus that the other social networking sites do not have, one that targets a specific demographic or function.  An example of this is Yelp, a site uniquely dedicated to the food and restaurant business where users can comment on or recommend certain places.

The start up costs associated with the developing of a social networking site requires a certain amount of financial backing, one where a majority of the funds are most likely provided by the developer. However, in some cases –such as Twitter –financial backing was provided by venture capitalists, or “a person or organization that invests money into new businesses in the hopes that the business will succeed and return a profit to the investors,” (http://computer.howstuffworks.com/internet/social-networking/information/start-social-networking-site2.htm). But Twitter seems to be the exception as it is rare for venture capitalists to invest in a start up for a new social networking site. While advertisements can be substantial in boosting profitability for a social networking site, it is not the only way for such site to garner revenue. Some social networking sites sell their users’ personal and professional information and connections to certain companies, while others, such as Facebook, have recently issued an IPO.

Social media has effectively changed how business models are now devised. “Social networks operate under an autonomous business model, in which a social network’s members serve dual roles as both the suppliers and the consumers of content. This is in contrast to a traditional business model, where the suppliers and consumers are distinct agents.” (http://howtostartasocialnetwork.com/2008/05/05/how-to-start-a-social-networking-website-part-2-business-models-and-revenue-streams/)

It has been during the past few years, that users have been starting to navigate social media through their mobile devices, a behavior that has allowed companies to shift into new a territory: viral marketing. “Already, one of every four minutes online is spent using social media, and advocates see lots of room for growth. Usage of social media on mobile devices is expected to continue to surge. Social is spreading internationally. In addition, enterprises are increasingly adopting social networks internally for collaboration and externally for marketing and sales. Jim Farley, chief marketing officer at Ford, said, “We want to take that stupid little box we were forced into as advertisers, blow it up, and change the way we interact with the customer.” (http://www.forbes.com/sites/hardeepwalia/2013/11/18/how-to-profit-from-social-networking-stocks/)

This transition into mobile advertising has given companies a new forum in how potential consumers are now being marketed to, one that also comes at a cheaper cost. “In addition, social usage is clearly moving to mobile devices, but social companies are finding it hard to charge as much for ads on mobile devices as they can for desktop ads.” (http://www.forbes.com/sites/hardeepwalia/2013/11/18/how-to-profit-from-social-networking-stocks/)

When it involves social media, no specific demographic is targeted when it comes to the marketing for a specific consumer. This is because, at any moment, a user can potentially be exposed to a product through his or her personal social network. It has been reported that Kim Kardashian, who has millions of followers, gets paid upwards of $10,000 for her to tweet about a specific product or merchandise. Companies not only rely on celebrities such as Ms. Kardashian to tweet about a specific product, but they also rely on users as well to publicize their company with offers stating that if a user “repost” their product, they become eligible to win whatever giveaway or free merchandise that the company has promised. This is the same basic strategy followed by individuals when they participate in the lottery, but with more incentive given that a “repost” is done at no cost to the user. Further adding to the appeal, this form of marketing requires only a second of a user’s time to repost such an image or giveaway on their personal page. To the company seeking publicity, reposting is the ultimate form of free advertisement since the user’s followers, seeing such an enticing offer, might be more inclined repost on its behalf. The result of this reposting is invaluable in terms of exposure, given the potential for breaking into new markets.












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