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How Does Facebook Make Money?

written by: William Springer•edited by: Amy Carson•updated: 11/3/2010

How does a free service pull in half a billion dollars a year in revenue? Hint: it's not all ads.

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    Getting Rich Off a Free Website

    Facebook may be free to use, but its revenue has more or less doubled every year since 2007, and the founder is now a billionaire. How does Facebook make money? As with Google, Facebook makes most, but not all, of their money from one source: advertising.

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    Advertising Revenue

    Unsurprisingly, Facebook makes most of their money off of advertising. Facebook ads brought in $300 million in revenue in 2008, $500 million in 2009, and ad revenue is expected to reach $800 million in 2010.

    Facebook offers two types of advertisements: self-service ads and engagement ads. The first type are fairly simple: they consist of a title, picture, and a bit of text, and the user can click the link or "like" the advertisement. Engagement ads are more complex; they allow for things like surveys that let the user interact with the advertisement.

    In 2009, Facebook brought in between $250 and $300 million from self-service ads and $100 million from endorsement ads.

    Facebook also displays a large number of Microsoft ads (due to a 2007 ad deal); as of 2009, that spending had reached $50 million.

    Because Facebook knows a lot about its users, it's able to allow users to precisely target those who are most likely to click on the ads, which allows them to offer a fairly low cost per click. Aside from making the advertisers happy, this also improves the user experience because users are more likely to see advertisements that actually interest them. For example, a user may list a particular band as being one of his interests. When that band has a new CD out, they may opt to have the advertisement to that CD shown only to people who have identified them as an interest.

    Because Facebook has so many users (more than five hundred million active users, at last count, with half of them logging in on any given day), they can show billions of ads every day.

    Facebook's self-serve targeting (advertisers set up everything themselves using a simple web form; Facebook employees merely approve the ad text) means new advertisements can start running almost immediately with minimal effort, keeping costs down for both Facebook and their advertisers.

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    Facebook Gifts

    Ever notice how you can send virtual gifts to your friends, particularly on their birthdays, for the low, low price of just $1 per gift, which entitles them to put a small picture of the gift on their Facebook page? In 2009, Facebook earned between $30 and $50 million for these virtual goods.

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    Want to level up faster in your favorite Facebook game? Buy a premium item not available to other players? Many Facebook games now let you buy extra goodies using credits, which are sold by Facebook for ten cents each. As of this writing, there are over two hundred applications that accept Facebook credits, with more being added all the time.

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    So how does Facebook make money? They provide a great platform that makes it easy to connect with your friends, then sell you entertainment: fun graphics, enhanced gameplay, relevant advertising. Their greatest advantage is the detailed personal information they have on hundreds of millions of users, which allows them to specifically target a significant percentage of the world's population.

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