Social Media Technology Explained

How Do Social Networks Make Money? Explained

Joe Keeley Updated 22-06-2020

Ever wondered how social media companies make money? The likes of Facebook, Twitter, and Reddit all let you sign up and use the website for free—which billions of users have done. How do these platforms generate income and stay profitable?

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Most social media networks make money through advertising to you. There are other methods, like raising finance through investment or premium membership schemes. We’re going to look at all the ways that social media companies make money.

1. Venture Capital

Investment
Image Credit: Micheile Henderson/Unsplash

Venture capital is a form of private financing and it’s how a lot of social media companies got their start.

Venture capital is when an investor, such as a wealthy individual or investment bank, believes that a start-up business has potential. They then invest money (or sometimes their time and expertise), usually in return for a share of the business. The larger their share in the business, the more influence they have over its decisions. The hope for the investors is that they make their money back and more when the business is larger and becomes profitable.

Sites like Facebook and Twitter have received hundreds of millions of dollars in venture capital. Nowadays, with hindsight, we can say that those investors made very smart choices, but venture capital is a risky game and investments don’t always pay off. Would you have invested in Facebook when it was called “Thefacebook” and only available to Harvard students?

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2. Advertising

Promoted tweet

The biggest way that social networks make money is through advertising. There’s a reason why the sites are designed to be addicting. The more you look, the more advertising you’re exposed to.

You can see it everywhere you go. Promoted posts on Reddit’s front page, videos within Instagram’s Stories, sponsored tweets on Twitter’s timeline, and so on.

Consider that Facebook alone has 2.6 billion monthly active users. Those are a lot of eyeballs ready to be exposed to the latest goods and services that companies want you to buy (here’s how to change your Facebook ad preferences How to Change the Ads You See on Facebook In this article, we'll explain how Facebook collects data about you, and how to view and change Your Ad Preferences. Read More ).

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Social media platforms charge companies money so they can advertise on their site. The exact cost of that depends on many factors. For example, companies can pay more for their advert to be seen by more people or promoted for a longer period of time.

Advertising is a fine line to tread. If social media companies flood their sites with too many adverts, users will be turned off or use ad-blockers. Just the right amount and users will be more likely to see things that interest them, click through, and potentially make a purchase.

3. User Data

Facebook ad matching

Another big source of income for social media platforms, and a controversial one, is through collecting and selling user data.

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It’s important to understand what this means. Facebook, Twitter, Instagram, and the like aren’t selling identifiable information like your phone number, email address, or other private details to companies.

However, what many of them do sell is aggregated and anonymized usage patterns.

For example, Twitter sells advanced access to its API, which companies can use to view all historical tweets and filter, sample, and batch them. This makes up around 13.5% of Twitter’s revenue.

Another example is Facebook, which has often been under the spotlight thanks to things like the Cambridge Analytica scandal. Despite the uproar, Facebook isn’t purposely giving other companies your data—they want to keep it for themselves. However, Facebook monitors your usage, such as the pages you like, and uses this to put you in a category so that advertisers can pay to target that group.

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4. Premium Memberships

Reddit premium

All the popular social media sites let you make your account for free. However, some of them lock additional features behind a paywall in the hopes that you will pay for these premium memberships.

One example is Reddit’s Premium subscription What Is Reddit Premium and How Does It Work? Reddit offers a membership tier called Reddit Premium. What is Reddit Premium and how is it different from Reddit Gold? Read More , which gives you an ad-free experience, access to an exclusive subreddit, a profile badge, and more. Reddit also sells Coins, which you can buy to give other users badges in reward for good contributions.

Another example is LinkedIn Premium. This gives access to LinkedIn learning courses, greater insight into who is viewing your profile, the ability to send InMail to recruiters, and more.

The majority of users won’t pay for these premium memberships, which is one of the reasons that the base account is free. However, for those people who are willing to pay, it makes for a good income stream for the social networks.

5. Transaction Fees and Virtual Products

Facebook fundraisers

Some social networks offer services for other people to sell or raise money through them. The social network will collect a transaction fee on this.

For example, on Facebook you can raise money for charity. Facebook used to charge a transaction fee for this, but no longer do. However, they do still charge for personal fundraisers, which they claim is to “cover payment processing” and “taxes”.

Also, if you buy something through a game or service within Facebook, the social network will take a cut of that purchase before it reaches the developer.

Another way of making money is through virtual products. This can be seen in something like Tumblr, which charges for some blog themes. Elsewhere, Facebook used to sell “Gifts” (amusing icons that you can put on someone’s profile), but they’ve since retired this.

6. Diversifying

Facebook Portal

Once a social network grows large enough, they look to diversify. For those with enough capital, buying other companies is a quick way to do this.

It’s why Facebook own WhatsApp, Instagram, and Oculus. It’s also why Twitter has acquired companies like Gnip, MoPub, and Periscope. Not only do they get the technologies and user data that these companies possess, but they can also use them as an additional revenue source to fund their social media platform.

Diversifying goes beyond just buying other companies. For example, take the Portal. This is Facebook’s video chat camera. They want you to buy this not only to make a profit on the physical device, but also to hook you in to their ecosystem—soon you’ll be using Messenger to chat to friends or Workplace to collaborate within your business. Though note there are concerns with Facebook Portal privacy Can You Trust Facebook Portal Devices With Your Privacy? The Facebook Portal home assistant, shopping and video chat device looks amazing. But is it a massive privacy risk? Read More .

How You Can Make Money on Social Media

There’s a saying that “if something is free, you are the product.” That’s especially true in the case of social media. It’s not necessarily a bad thing, but it’s good to be aware.

If you’re looking to make some money of your own with social media, check out the best affiliate programs on Instagram to make money The 7 Best Affiliate Programs to Make Money on Instagram If you're looking to make money on Instagram, here are the best affiliate programs to look into. Read More .

Image Credit: jhansen2/Depositphotos

Related topics: Facebook, Instagram, LinkedIn, Online Advertising, Reddit, Twitter.

Affiliate Disclosure: By buying the products we recommend, you help keep the site alive. Read more.

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  1. Lola
    July 21, 2020 at 6:45 am

    Thank you for the article. Indeed, it turned out that the media are trying to make money on almost everything. I'm especially concerned about their attempt to collect as much user data as possible in order to make money on it as well. https://utopia.fans/privacy/the-social-media-giants-age-how-your-data-makes-them-money/ I believe that this violates the very concept of privacy, because tracking movements, maintaining personal correspondence is not very similar to the promised "confidentiality".

  2. bilal aftab
    September 25, 2018 at 2:37 pm

    great this is first step to become billionaire ... social medias generate reveniew from normal user

  3. alfredo
    April 3, 2016 at 5:10 pm

    how much can earn someone with 1000000 users in his social network?

  4. Andy
    June 13, 2010 at 7:06 pm

    Great post! This is what I've been telling friends about--one can actually make money from social networking sites. They are a growing community, one with millions of new registered users every month, there are tons of money-making opportunities there. Build a massive list of targeted buyers and you can be making easy cash in no time. Invest your time learning how to make money with social networking sites and it will be a time well spent. I should know. I'm earning from it.

  5. Andy
    June 13, 2010 at 5:06 pm

    Great post! This is what I've been telling friends about--one can actually make money from social networking sites. They are a growing community, one with millions of new registered users every month, there are tons of money-making opportunities there. Build a massive list of targeted buyers and you can be making easy cash in no time. Invest your time learning how to make money with social networking sites and it will be a time well spent. I should know. I'm earning from it.

  6. Kyle Korbin
    May 12, 2010 at 4:46 am

    Never thought much about these sites operate and make money to pay their expenses, IE: employee wages. Really interesting to see how they make money operating a free to use site. Thanks.

    • Steve Campbell
      May 12, 2010 at 4:53 am

      Glad you liked it Kyle. Thanks!

  7. Steve Campbell
    May 9, 2010 at 8:37 pm

    That is an excellent point. We'll be seeing more of that in the future
    I'm sure.

  8. Anonymous
    May 9, 2010 at 6:22 pm

    One thing not mentioned on here is entertainment. People pay for credits to play games from zynga like mafia wars, surely facebook also makes money from this? I would have thought providing paid for content such as music, films, tv, online casino type paid for games would be a good avenue to pursue for social networking sites?

    • Steve Campbell
      May 9, 2010 at 6:37 pm

      That is an excellent point. We'll be seeing more of that in the future
      I'm sure.

  9. hardikjakharia
    May 8, 2010 at 9:15 am

    Nice article.. although wouldnt consider advtg on web as new, as we have an entire mnc Google earning its bucks from it..

    - Hardik Jakharia

  10. Anonymous
    May 8, 2010 at 7:15 am

    Nice article.. although wouldnt consider advtg on web as new, as we have an entire mnc Google earning its bucks from it..

    - Hardik Jakharia

    • Aibek
      May 8, 2010 at 9:48 am

      sorry, I missing the point here!

  11. Anders
    May 8, 2010 at 12:34 am

    I agree that Facebook and twitter can help to improve marketing strategies of any business. I am trying my site [Broken Link Removed] using these two social networks but the resulst is not bad so far but not exciting yet!

  12. Anders
    May 7, 2010 at 10:34 pm

    I agree that Facebook and twitter can help to improve marketing strategies of any business. I am trying my site [Broken Link Removed] using these two social networks but the resulst is not bad so far but not exciting yet!

  13. Saikat Basu
    May 1, 2010 at 2:38 pm

    Very informative post, Steven...you have covered all the angles.

    • Steve Campbell
      May 2, 2010 at 4:02 pm

      Thanks! I was wondering if I missed any haha

  14. Î??ç???™
    May 1, 2010 at 4:15 am

    Nice Article! :D

    • Steve Campbell
      May 2, 2010 at 4:03 pm

      Thank you! Glad you liked it.