How much money do you pay Facebook (FB) to maintain your personal account?
Nothing, eh? After all, on FB’s home page, it exhorts new visitors to Sign up … it’s free and any one can join. Although you might spend money on products and services that are advertised on your FB Wall page, you don’t actually pay for this service, do you?
Not exactly; at least not directly, but someone is indeed paying the firm to serve you. And considering FB’s recent announcement of its new LIKE Button strategy, it appears to be preparing to collect significant incremental revenue for your continued patronage.
LIKE vs. EASY
Buttons, both real and virtual, have been serving as the cornerstones of effective marketing strategies for centuries. Americans, for instance, have been placing the names, slogans, and images of their politicians on buttons and ribbons since the time of George Washington. And in contemporary times, the business retail store Staples has been publicizing the image of an EASY button to persuade consumers that its products help simplify their lives.
But those are simply advertising messages; FB’s LIKE buttons instead function as direct generators of revenue. In fact, by simply clicking on these buttons, FB users directly help the firm and its business partners earn more revenue. In a sense, each button click turns a FB user into a sales representative for these firms.
How does a simple click turn into revenue? It’s a simple business proposition: FB is contracting with vendors throughout the internet to place its LIKE buttons on their web sites. It is encouraging its FB users to click on these buttons whenever they visit these vendors’ sites and see products and services that attract their interest. Their preferences will then be instantly recorded on their FB pages, transmitted to their FB friends, and recorded by FB for future marketing initiatives. All that information gathering and sharing will inevitably generate more revenue.
It’s The Latest Thing!
In a sense, this strategy is as old as the marketing button itself. Firms have been giving away small gifts in exchange for mailing list contact information for well over a century, ever since Sears Roebuck pioneered the mail order catalogue in the 1890s.
More recently, marketing firms have paid focus group participants to provide feedback about various products and services, and professional sports teams have handed out branded merchandise to fans who have joined booster clubs. All of these strategies have involved the collection of contact information and personal preferences in exchange for brand loyalty.
Nevertheless, these various strategies differ from Facebook’s business model in one crucial manner: they all presume that the target consumer who shares their information and preferences will eventually purchase something from the firm. FB, though, doesn’t aspire to sell anything to its core consumers at all. Instead, it wants to help other firms access its users by encouraging them to express their preferences online.
In other words, the FB LIKE button simply represents the latest version of a venerable marketing strategy. In essence, FB is providing a retail service at no charge to a consumer population, and is then selling its access to this population through traditional wholesale contracts.
The Cost of Lost Opportunities
FB is thus selling data about our personal preferences to other vendors. Nevertheless, they’re still providing us with free access to the FB service itself, which is a benefit that we all enjoy. So why should consumers consider FB a costly service?
It certainly isn’t costly in a direct sense; after all, a FB account is indeed available and free for all users. But economists remind us that we should always consider the indirect costs of failing to obtain benefits when we have opportunities to do so. They call such considerations opportunity costs; they can represent extremely significant factors.
Let’s assume, for instance, that a FB user purchases a $100 sweater on a fashion designer’s web site and then clicks on a FB LIKE button that appears there. Let’s also assume that the user’s 500 FB friends are then alerted of her purchase, and a relatively small proportion of them (let’s say two percent) visits the designer’s site and purchases one for themselves. The original purchaser, a FB user, would have been responsible for ten additional sales, leading to total incremental revenue of $1,000.
The Multiplier Effect
Given these assumptions, what incremental benefit would the original purchaser receive for helping the vendor (and its partner FB) generate $1,000 in incremental revenue? Nothing at all, at least nothing beyond the continued use of FB’s “free” service. In a sense, the original purchaser would have earned a greater benefit by gathering her ten friends together and by approaching the vendor directly to request a significant price discount.
Of course, economists also remind us that these ten friends may each click on the LIKE button and bring in additional friends as well, who may then do likewise in a pattern known as the multiplier effect. By failing to obtain any incremental benefit from triggering all of this sales activity, the original purchaser and each of her friends would incur significant opportunity costs, perhaps without ever realizing it.
That would be a costly deal for FB users, albeit a very profitable one for FB and its corporate partners!