Why You’re Not Like Facebook (But You Could Be)

This is about two companies: 

One is a current client of mine, a company which has defied the odds by remaining profitable (and even growing a bit) through the Great Recession, basically by doing what it does very well despite the economic pressures.  Alas, it’s slipped a bit in recent months, as several of the markets in which it operates are feeling the (thus far) little-discussed second wave of the recession, a wave prompted by recent layoffs of state and county employees as federal support funding is cut back.  Still, this client boasts higher average traffic counts and margins than most of its peers, and will survive, thrive and grow as it finds a way to reach out to other, less government-dependent markets.

The other is Facebook, a company which has made itself the center of most market discussions for the past several months.  Unless you were in a coma (or solitary) for a prolonged period, you’ve probably heard that Facebook went through its IPO recently.  There are a raft of stories which will be told about the screwups -- and possibly worse -- around the IPO, but you’ll read about them elsewhere.  What I want to point out is the difference between Facebook and your company, or my client.

My client, like most restaurant companies and many others, is built off the quaint notion that income comes from providing a product and/or service to each customer.  Restaurant companies are a bit unique in that they provide both a product AND a service in most instances.  Whether the product is ordered a la carte, served as a buffet, or as a prix fixe menu, the base service cost is factored into the price.  Social convention, and economic reality, have established the practice of the customer adding a service surcharge (tip) in many circumstances, and the restaurateur will keep that surcharge’s existence in mind when setting prices and allocating costs.

Facebook’s model is different, and in many ways very clever: it provides a free service to its users.  The users, in return, provide personal data, references (friends), and examples of behavior (click here if you like ____).  Facebook then absorbs and analyzes this data and sells it to the parties who intend to make use of it for advertising, cause marketing, or the sale of games and other virtual products tailored to the Facebook audience.  The underlying premise of this business model, dating back long before Facebook, is that a sufficiently large user group must be worth something, and the more data which can be collected, the greater the value per user, as that data provides advertisers with an ever-more-precise way to reach the exact target consumer they seek.

So ... every day, my client’s consumers cast a vote for its continued success -- or against it.  Every day, the restaurateur tailors his or her operation just a bit based on those votes.  Restaurants may seek to add customers, or not, depending on the results; sometimes they’ll conclude it’s better to raise the prices a bit in order to cut down on the crowds or manage against limited supplies.  (I know, most of you haven’t said that lately, but at other points in the cycle it’s been a very practical choice.)

On the other hand, the Facebook model has tended to reward companies for giving away more (new features, primarily) in order to constantly add new users and hold existing users for just two more minutes during each visit.  Again, the theory is that the more visitors, and the more visits, the more value that must equate to for SOMEONE.

There are now internet companies trying to break out of this model.  Many newspapers and magazines are limiting access to certain features, or permitting only (gasp) paid subscribers access to certain features.  For them, the volume model hasn’t translated to profits.  It’s an open question how it’ll all shake out, although there’s clear evidence that there’s at least SOME value to large user lists.  The question which won’t be answered for some time is whether that value reaches $38 per share.

Interestingly, no company which actually provides concrete (as opposed to virtual) products has expressed any interest in exploring the Facebook model, simply because they must recoup all the cost of the product and affiliated service before trying to mine the customer relationship for other value.  I don’t count the Panera “pay what you like” stores as a form of this model; there’s a clear explanation, and expectation, that while the store is providing a public good, it also requires the support of at least most of its patrons to keep the experiment alive.

I’d also recommend an interesting piece by Ross Douthat of the New York Times, on May 27, which explores this question from a different angle.  It can be found at The Facebook Illusion.

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Tags: expenses, profit_model


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