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How Does Facebook Make Money? Ads, Ads, Ads


Facebook has a massive global audience. Every
month, 2.3 billion people log into its namesake platform to connect with friends and family.
That reach is practically unprecedented, and advertisers have taken notice. Over seven
million use the platform to reach customers. Advertising is the moneymaker for Facebook,
comprising 99% of the company’s overall revenue. In this video, we’re going to explain how
Facebook turns status updates and pictures of your dog into a multi-billion-dollar
advertising empire. The global digital advertising marketing is
effectively a duopoly controlled by Facebook and Alphabet’s Google. In 2019, the two platforms are
projected to control over 50% of the $327 billion market. Facebook alone logged over $55 billion
in revenue in 2018, up 37% year over year. Facebook and Google
tackle advertising slightly differently, but their success comes down
to the same thing: targeting. Targeted advertising uses sophisticated methods to let marketers
drill down to specific audiences. These groups have certain traits that are related to the
product or message the advertiser is selling. The traits might be demographic and involve
gender, age, level of education, income level, or employment; or they could be psychographic
traits that focus on the consumer’s values, personality, attitudes, opinions, lifestyles,
and interests. Add some behavioral variables to the equation like browser history,
purchase history, and other recent online activity, and you have a very firm idea of who a consumer is.
With all of these tools at their disposal, advertisers can focus on the most qualified
people for their message, leading to better performing campaigns and higher return on
investment for every ad dollar spent. Facebook is a goldmine for this kind of targeting
because it knows who you are, where you work, your friends, and your interests from the
pages you follow. And it has that data on a lot of people. As already mentioned, Facebook
has about 2.3 billion global monthly active users. Its photo-sharing property Instagram
also boasts about one billion monthly active users. But some of that audience is more valuable
to advertisers than others. Of those 2.3 billion monthly Facebook users, about 10% are in the
United States and Canada, and Instagram users in North America account for 13% of the company’s
total users. All told, North America made up 48% of the company’s revenue in 2018.
That’s because on a per-user basis, users in the U.S. and Canada are more valuable to advertisers.
Ad rates are generally a reflection of consumer purchasing power. Worldwide, Facebook earned
an average of roughly $25 per user on ads in 2018. But in the U.S. and Canada,
that average was almost $110. Unfortunately, growth in Facebook’s home market
is going to be harder to come by because it’s pretty saturated. Just think about it.
Thanks to the network effect, most people you know are on Facebook. That’s why you’re on Facebook.
The platform had 231 million monthly active users in North America at the end of 2016.
In the past two years, it’s only added 11 million to that total. During that same time,
the platform saw international monthly active users go from 1.6 billion to 2.1 billion.
So, what’s Facebook doing to adjust? The company has really turned on its ad engine
for its other properties, like Instagram, to help maintain its growth figures. Specific numbers
are hard to come by, but one source estimated that Instagram’s U.S. ad revenue jumped 70%
in 2018. Other sources say Instagram’s overall revenue will grow to $10.9 billion in 2019,
representing a 22.5% jump year over year. The company also has two messaging apps, WhatsApp
and Messenger, that each have over a billion monthly users. But so far, Mark Zuckerberg
and company haven’t quite figured out how to monetize them. Targeted ads
are the reason investors like Facebook. Long-term, the company will have
to figure out how to port that model to its messaging apps or find another
way to monetize its untapped platforms. Thanks for watching! If you have a company
you’d like to see us break down, mention it in the comments section below, and be sure
to like the video and subscribe to get more videos like this from The Motley Fool.

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