Business Model of Facebook

Author- | Posted- | Updated: September 7, 2020 |

How Facebook makes money: An analysis of its business model.

With more than 2.7 billion monthly active users as of the second quarter of 2020, Facebook is the largest social media network of the world. It is the most favorite social media channel of millennial users and an excellent social media marketing channel for business marketers. Facebook has enjoyed enormous growth in its revenue and user base in recent years. The proliferation of the internet worldwide, combined with many more factors, supported the rapid growth of social media channels.

Facebook has also been riding this wave, gaining higher momentum, as users’ addiction to this network continued to grow over the years. The product mix of Facebook Inc., apart from its central platform, includes Instagram, Messenger, Whatsapp, and Oculus. In recent years, there has also been a growth in the number of challenges before Facebook. Apart from privacy concerns and data security-related issues, more challenges have emerged like misinformation during the pandemic as well as the rampant spread of fake news on the platform. Despite these challenges, the popularity of Facebook has continued to grow. The social media network allows people from around the world to connect with others and form communities. While Facebook is already enjoying immense popularity, Instagram has also found a lot of success and expanded its customer base enormously. The main drivers of Facebook and Instagram’s success are technological advancement and innovation. Both the platforms are highly popular among marketers apart from individual users. In the world of marketing, terms like Instagram influencers and Instagram marketing are now standard showing the hidden power of Instagram as a marketing channel.

Around the world, technological changes are happening fast, and competitive pressure on Facebook is also high. Regulatory challenges are also limiting the prospects of growth. However, Facebook is expecting more growth in the future. 

Let’s have a look at how Facebook’s business model works, what are the reasons behind its success, and the leading risks and challenges that can potentially hurt its business. 

Primary products  of Facebook

Facebook Business Model
Facebook Business Model

Facebook is headquartered in Menlo Park, California. Apart from Facebook, the other products it owns include Instagram, Whatsapp, Oculus and Messenger. The mission of Facebook is to give the people the power to build community and bring them close together. The main focus of the business to create useful and engaging products that help people connect and share with their friends, families and communities. 

Facebook 

Facebook is mainly a social media platform enabling people to connect, share, and communicate using multiple devices, including smartphones, tablets, PCs, and other internet-enabled devices. Apart from that, it offers an optimized news feed and also serves personalized ads. Users can connect and engage with other users and groups through Facebook as well as share information and write on others’ timelines.  

Instagram 

 Instagram is also a popular social media network for sharing images, videos, and messages. People can find and follow others that share their interests. The platform has grown highly popular as a marketing platform. There are fashion, fun, and food brands flocking to Insta in larger numbers than ever before. Instagram’s popularity as a marketing platform surged due to Instagram influencers who offer the sponsors exposure to their millions of Insta followers. Celebrity accounts are mainly among the most followed ones on Instagram. 

Messenger 

Messenger is a simple messaging tool with simple and easy to use interface equipped with powerful features. Users can send private and personal messages to their friends and family using this app. Because of its simple and easy to use interface, the messenger has grown highly popular and seen its use grow worldwide.  

Whatsapp  

Whatsapp is also a simple and powerful messaging tool that has grown highly popular worldwide for its simplicity, convenience, and powerful messaging and sharing features. You can message and share with security and privacy to individuals as well as groups. These features have made it a popular application even in business circles. Its simplicity and ease of use have helped it find organic growth faster. 

Oculus 

Apart from virtual reality products including hardware/software, Oculus offers special products/tools for the developers. 

How Facebook makes money? Revenue sources of Facebook 

The primary source of revenue for Facebook is advertising. The company generates substantially all of its revenue by selling advertising to marketers. The advertising model of Facebook is similar in various aspects to that of Google. Marketers can reach a broad audience through Facebook ads and use advertising tools and features for customer segmentation and effective targeting. They can segment and target customers based on age, sex, location, interest, or behavior. Marketers can purchase ads that will appear on Facebook, Instagram, Messenger, and on third party websites and apps.  The marketers can pay for the advertising directly or through resellers and advertising agencies.  Facebook charges for ad placements based on the number of impressions or specific actions like clicks.  

The objective of the marketer may be impression or click or both. When an ad is displayed to the user impression is considered delivered. However, in the case of action-based ads, the ad is considered delivered when the specific action is taken. Facebook has continued to improve its ad business and the structure of ads and so the number of ads shown is subject to methodological changes. The total ad revenue is divided by the number of ads delivered to know the price per ad. The price per ad reflects the effective price the marketer paid per impression irrespective of whether he paid for impressions or actions. In the case of the advertising arrangements made through resellers or advertising agencies, the revenue is recognized on a net basis. While advertising is the source of substantially all of its revenue the company also derives a smaller part of its revenue from payments and other fees. The net fee that Facebook receives from the developers using its payment infrastructure comprises the payment fee. The ‘other fees revenue’ of Facebook includes the revenue it earned from hardware as well as various other services. 

Financial performance: 

The revenue of Facebook has increased fast during the last five years. It has more than doubled between 2016 and 2018. The revenue of Facebook in 2016 was 27.6 Billion dollars which grew by 47% in 2017 to 40.6 Billion dollars. Again from 2017 to 2018, the revenue of the company rose by around 37% reaching 55.8 Billion dollars. The company has experienced growth in revenue mainly due to rising advertising revenue. Apart from the user base the ad business of Facebook has also experienced fast growth in the recent years. 

A substantial part of the entire revenue of Facebook is generated from advertising. Out of the total 55.8 Billion, 55 Billion were generated from advertising in 2018. Growth in the use of mobile devices globally was the main driver of growth in advertising revenue. Around 92% of the total advertising revenue Facebook earned was generated from advertising on mobile devices. Apart from the number of ads delivered, the average price per ad was also higher in the year 2018. The number of ads delivered in 2018 was around 22% higher in 2018 as compared to 2017. The average price per ad also grew by around 13%.   

Major drivers of growth in advertisement revenue: 

Apart from the number of users, the overall engagement level also grew across the entire platform leading to a rise in revenue from ads. The number and frequency of ad delivery also grew across Facebook products in 2018. Growth in demand for Facebook’s ad inventory led to growth in the average price per ad. The rise in demand for Facebook’s ad inventory was caused by several factors. Apart from increased ad spending in the existing markets, the number of marketers advertising actively on Facebook as well as the relevance, quality, and performance of Facebook ads has also continued to improve. These factors have led to growth in demand for Facebook ad inventory. However, the advertising revenue of Facebook is also affected by seasonality. Traditionally, the advertising revenue of Facebook has remained the strongest in the fourth quarter which is because of the higher advertising in the holiday season. The fiscal year at Facebook ends in December. This is the time when ad spending is at its highest across all the major platforms including Google. After that, it falls again in the next quarter. 

Cost of Revenue and operating expenses: 

Cost of Revenue:

The cost of revenue at Facebook is mainly comprised of the costs associated with the delivery and distribution of Facebook’s products/services. It mainly includes the costs associated with operating the Facebook data centers. Facebook has built its own data centers through which it serves its products and also plans to expand the size of its technological infrastructure mainly by investing in data centers and other projects. Apart from the United States, it also has several more data centers located internationally. The company has offices and data centers in more than 30 different countries. The cost of revenue at Facebook also includes the costs related to the partner arrangements including the costs related to the acquisition of traffic and content as well as transaction processing fees and the costs of consumer hardware inventory sold. 

The cost of revenue increased by 72% in 2018 compared to the previous year rising from around 5.5 Billion dollars and reaching around 9.4 billion dollars. The increase could be attributed mainly to the growth in the operating expenses for the data centers and other technological infrastructure as well as higher content and traffic acquisition costs.  

Research and development costs: 

Research and development at Facebook include the development of new as well as the improvement of the existing products. The R&D expenses of Facebook mainly include the share-based compensation, salaries and benefits for the employees in its engineering and technical teams who are involved in Research and development. The R&D expenses grew by 32% from 2017 to 2018 rising from 7.8 billion dollars to 10.3 billion dollars. It happened mainly because of an increase in the number of people involved in R&D as well as to a small extent growth in expenses on professional services. 

Marketing and sales costs: 

Marketing and sales costs are related to sales, sales support, marketing, business development, and customer service functions. Expenses mainly include salaries, share-based compensation, and benefits for employees working in these areas. The marketing and sales expenses of Facebook grew from 2017 to 2018 by 66% which happened mainly because of the rise in the number of people working in the sales and marketing functions leading to rise in the payroll and benefits expenses. Apart from that expenses related to marketing and community operations also increased. Marketing and sales expenses increased from 4.7 to 7.8 Billion dollars.  

General and administrative expenses:  

The G&A expenses mainly include the share-based compensation, salaries, and benefits of the employees in legal, finance, human resources, corporate communications and policy, and other administrative functions. Apart from that it includes expenses on legal related costs and professional services. There was a 32% increase in the number of employees in the general and administrative functions causing an increase in the payroll and benefits expenses. The General and administrative expenses of Facebook grew from 2.5 to around 3.5 Billion dollars from 2017 to 2018. 

User Trends:- 

Facebook is an innovative technology company and spends a large sum each year on research and development every year. The key metrics that Facebook uses to measure user activity and revenue include DAU, MAU ad ARPU. DAU is the metrics for Daily Active Users, MAU for Monthly Active Users, and ARPU for Average Revenue per User.  

DAU and MAU measure the number of users only on the Facebook platform excluding the Instagram, Whatsapp and Oculus users. Changes in the user trends affect the revenue and profits of Facebook by affecting the number of advertisements it is able to show as well as their value to the marketers. A substantial part of the entire Facebook user audience accesses Facebook and messenger on mobile devices.  

A daily active user is a user who accessed Facebook or messenger on a given day through its website or on a mobile device. DAUs and DAUs as a percentage of MAUs are the measures of user engagement. There was a rise of 9% in DAUs from December 2017 to December 2018 rising from 1.4 Billion to 1.52 Billion. The rise was mainly affected by the rising number of users in India, Indonesia, and the Philippines.  

A Monthly Active User is a user who accessed Facebook through its website or a mobile device during 30 days of the day of measurement. MAU is a measure of the size of Facebook’s global active user community. The number of MAU’s rose by 9% from December 2017 to December 2018, reaching 2.32 Billion.  

The company calculates its ARPU based on the user geography, and its estimate of the geography in which impressions were delivered, or other goods and services were sold. ARPU is obtained by dividing the total revenue of Facebook in a quarter from given geography divided by the average number of MAUs at the beginning and end of the quarter. The geography is the user affects the financial results of Facebook since the company monetizes the users in different geographies at different rates. The US and Canada are maturer and broader online and mobile advertising markets due to which the average rates are higher there. In 2018, the ARPU of Facebook in the US and Canada markets was around ten times higher than that in the Asia Pacific. However, each of the geographic regions saw significant increases in their ARPU in the 2017-18 period.  ARPU increases in the respective geographies were as follows: 

  • US and Canada: 33% 
  • Europe: 34% 
  • Asia Pacific: 20% 
  • Rest of the World:  21% 

Risks & Challenges in Facebook’s business model: 

With the growth and proliferation of internet technology and its increased availability and speed throughout the globe, the internet-based services and social media websites have enjoyed immense growth during the recent years. Facebook is a leading social media platform that has seen its user base and popularity grow very fast in recent years. Increased use of the internet and a focus on innovation are the key reasons behind its fast growth in the user base. However, the number of risks and challenges before Facebook has also kept growing. Apart from increased government pressure since the recent data scandal, the company is also facing higher pressure in the form of increased competition from numerous internet companies and online sources of entertainment. There are more challenges before Facebook. Take a look at some of them: 

Higher competition 

Competition in the web world has grown fast, and Facebook has numerous competitors. Several of them compete for advertising revenue with Facebook, including Google, Amazon, and Microsoft. Apart from them, there are other internet companies like Tencent that are competing with the product offerings of Facebook, including its social media platforms and the messenger. Moreover, there are regional social media companies plus YouTube, Twitter, and other social media channels that are competing for user base and market share with Facebook. The internet industry is known for rapid innovation and technological disruption. There is always the fear of competitors using new and advanced technologies to disrupt Facebook’s business. It has also led to Facebook spending a substantial part of its revenue on research and development. 

Overdependence on advertising for revenue  

Facebook generates a substantial part of its revenue from advertising and especially mobile advertising. A significant portion of its user base is accessing Facebook on mobile devices. While the competition for every penny from online advertising has grown, Facebook’s business model relies nearly entirely on its advertising revenue. While its revenue model is profitable, there are also some significant hurdles and risks like the rise of adblocking technologies that are already eating into a substantial part of advertising revenue.  

User attraction and retention: 

The financial success of Facebook depends upon the size of its user base and its ability to engage the users to a large extent. Attracting and retaining users is a crucial challenge before Facebook, which has to introduce new features and continuously focus on innovation to make its platform all the more engaging. It has also led to higher expenditure on things like R&D as well as marketing.  

User engagement on mobile devices: 

Substantially all of the Facebook users are accessing the platform through mobile devices. The user base accessing the site on desktop and laptop devices has shrunk. As such, the platform needs to be more mobile-ready and its features engaging for mobile users. It is a crucial challenge before Facebook. It has focused upon making its features engaging as well as adding new features that make it more convenient for mobile users to message and share. Since a substantially large part of the advertising revenue comes from mobile devices, the company has made the mobile experience a central focus. However, this has also led to growth in operating expenses. The higher operational costs are eroding profit margins. However, the operating costs have also grown due to increased headcount and increased marketing as well as research & development expenses. 

Regulatory pressure: 

There are a number of areas including data security and user privacy in which regulatory pressure on Facebook and other social media sites as well as internet companies has grown, the recent data scandal led to more controversy and debate. Internet companies like Facebook are facing higher scrutiny as well as legal oversight. This can limit growth prospects as well as lead to reduce revenue and profitability. User privacy, managing user-generated content as well as data security are some key areas where regulatory pressures might be expected to rise further. 

Reputation management 

Facebook, the leading and most famous social media channel, also enjoys a very high degree of media exposure. While on the one hand, it is beneficial for the company, on the other, any form of negative publicity affects its reputation and causes loss of revenue and user base. Managing reputation is a crucial challenge before the internet and social media companies. It has already received a lot of negative publicity following the recent data scandal and continues to be subject to higher media scrutiny since then.  In this way, there are several risks and challenges before Facebook and its business model. Apart from the competition and higher operational costs as well as user engagement challenges, the company is also facing many more challenges related to data security and user privacy. Overall the number of risks and challenges before Facebook is quite large, and the company needs to focus on several essential things on a priority basis. 

Five Operational Performance Objectives

Businesses need a set of operations performance objectives to manage their performance and profitability in the short and the long run.  There are five basic performance objectives that apply to every kind of business operation. In the case of large businesses that face a lot of competition, these objectives become even critical. These five basic operations objectives are – cost, dependability, flexibility, quality, and speed. The performance objectives have both internal and external implications and they are interrelated. The internal effects of these performance objectives have a definite impact on cost. 

Quality:

Quality is a leading operational performance objective. It refers to consistent performance according to your customer’s expectations. It has a significant impact on customer satisfaction. However, quality can have a different meaning in one industry compared to another. Compare an automobile business with a technology business. The same quality standards do not apply to each. So, quality can acquire varying meanings in different settings or industry environments. While in some industries, the level of staff friendliness is the main scale to measure quality, product efficiency is the main indicator of quality for another. However, no matter whatever industry a business belongs to, customers appreciate quality above other things. This is evident in the case of all the market leading brands that have built their positions and brand image through a consistent focus on quality. Quality can, therefore, have a direct and major influence on customer satisfaction as well as organizational performance overall.

 Quality is also related directly to a company’s social image. If a business delivers consistently according to its customers’ expectations, it will have acquired a strong image in the market and among its customers as well as the general public. Many things become easier for such businesses like customer acquisition through positive word of mouth. They also enjoy higher customer retention as well as higher brand recall. These things have the potential to grow an organization’s profitability. In the context of the technology industry and social media, quality is measured on the basis of many factors. While performance is a leading indicator of quality, pricing, marketing and brand image are also indicators of quality for computing brands. 

Facebook is the largest social media network. The main indicators of quality for social media channels include  customer experience, user engagement, marketing reach and ease of use among the others. Facebook enjoys very high user engagement on both its social media platforms – Facebook and Instagram. The higher user engagement also denotes the level of user interest in the social media channel. Facebook’s advanced technology features that drive higher user engagement are also a  sign of quality. The platform  is not without its shortcomings and has been facing government flak over several issues like consumer privacy, data security and fake news as well as antitrust issues. Still, in terms of user experience, Facebook continues to enjoy the position of the number one social  media network. The company continues to invest in technological innovation in order to grow user engagement and provide superior customer experience. Quality is one of the core factors that have been driving faster growth of Facebook through higher user engagement and by providing more effective marketing tools.

Speed:

The advancement of digital technology has helped the technology industry evolve. From search engines to social media and digital marketing, a lot has changed in our world with the evolution of digital technology. However, while companies are doing their best to acquire faster growth, speed has become a core factor driving business growth. Again, speed can have different implications for different industries. For example, it can mean something else for the physical hardware brands and something else for a search engine or a social media brand. The pace of technological innovation at a technology brand is also a sign of speed and critical to winning against the competition. Still, in nearly every industry speed matters just as much as quality or prices. Customers want products delivered to their doorsteps faster. In this era, where a large range of services are delivered and consumed online including a large range of technology and entertainment services, speed matters a lot. Sometimes, it can be the differentiating factor for a company helping it stand out from the crowd of brands. In other cases, superior speed may mean a superior customer experience.

The advancement of digital technology has led to enormous changes in the world. Speed has become integral to business growth. As in the case of social media companies, it is crucial to focus on innovation because of heavy competition. There are other social media channels like Twitter and YouTube, as well as online streaming websites like Netflix and Disney Hot Star, and several gaming sites and apps that compete with Facebook. Innovation is essential since the pace of innovation at a brand affects growth for any social media company. Facebook has brought a few products that help people connect with others fast and message them. Both messenger and Whatsapp are great for real-time messaging and staying connected with your near and dear ones. Facebook has also established an extensive network of data centers in various locations around the globe to ensure the availability of its services globally. Overall, when it comes to speed and availability, Facebook has proved itself outstanding.

Dependability:

Dependability or reliability is in itself considered a sign of quality in this era. Dependability, reliability, or trust are synonymous with brand equity which is an important strength for any industry-leading brand. How dependable your business is or how much your customers trust your brand affects your brand equity. However, there are several factors that affect dependability in each industry. For example, while the quality of raw materials and the final product will have a direct impact on the dependability of a business, in the case of others it is the timeliness of delivery.

 Keeping the promise you made to your customers also affects dependability. Another factor that has kept growing in importance for businesses as well as customers in the twenty-first century that also affects dependability is the overall level of customer experience. Brands that offer a superior customer experience overall are considered to be more dependable by the customers. Apple and Amazon are two great examples of companies that have maintained very high-level customer loyalty because they deliver superior customer experience.

In the 21st century customer loyalty is not easy to achieve since there are a large number of factors that affect dependability. Trust is the most important factor that affects how loyal your customers will remain to you over their lifetime. However, customer engagement and user experience are of higher importance in the context of the social media channels. Facebook has experienced a fast surge in its user base over the recent years which has been driven by its focus on innovation as well as user experience and engagement. The reason that billions of users as well as millions of small and large brands and marketers from around the world trust it is because of its reliability in various areas. Whether it is about connecting with your near and dear ones or for marketing, Facebook is considered one of the most effective social media channels. Apart from its availability and effectiveness, its huge user base is also a reason that marketers rely the most on Facebook for achieving their social media marketing objectives.

Flexibility:

Flexibility means the ability to change what, how, and when operations do. There are four types of flexibility in general that are applicable to business operations. They include product/service flexibility, mix flexibility, volume flexibility, and delivery flexibility. Product/ service flexibility means the ability to introduce new or customized products or services. Mix flexibility means the ability to widen the product/services mix to cater to the customer needs better. Volume flexibility denotes the ability to change the output level to produce different quantities of products/services over time. Delivery flexibility on the other hand means the ability to change the timing of delivery. Overall, flexibility is an important aspect of operational performance and superior flexibility also denotes superior performance. Flexibility can also acquire different meanings in different industrial environments. For example, in a healthcare environment, the ability to introduce new types of treatment and to widen the range of available treatments or the ability to adjust more patients and reschedule appointments can all be a sign of flexibility. However, in the case of the automobile, hospitality or retail industries, flexibility can mean different things.

Flexibility is important for businesses that want to taste success early. The more flexible the business operations of a company, the faster the business will taste success. It is because customer needs are evolving and customers’ expectations have also changed a lot with time. Having more flexible operations ensures that you are able to cater to the changing demand patterns with higher efficiency and retain the trust of all your stakeholders. 

Facebook is mainly a social media network that makes its services available to users all across the world through its social media platform. The company has expanded its user base a lot in recent years. It has expanded its data center network to various corners of the world so that its services are available to users irrespective of their location. Global expansion in the technology industry requires a very high level of flexibility and businesses like Facebook are doing their best in this area to cater to the needs of billions of users throughout the world. Even during the pandemic, these channels have proved highly useful for information dissemination as well as other purposes.

Cost:

Cost in terms of operations performance mainly means the operating expenses incurred by businesses. However, the proportion of various operating costs can vary from industry to industry. For example, staffing costs may represent the largest costs for a transportation company but the costs of raw material may be the largest group of operating costs for an automobile brand. In the case of most companies, if their operating expenses are low, they can also keep the prices low for their customers. Not all companies compete in the market on the basis of price.

 Some companies compete on product quality, other companies compete on the basis of customer service and others on the basis of marketing or all of these factors. However, even the companies that do not compete on the basis of prices, they too are interested in keeping their operational costs low. If a company reduces its operating expenses that will help it increase its profits because a penny saved equals a penny earned. To keep operating expenses low requires focusing on areas where the company incurs the highest operating expenses.

The two largest categories of operating expenses of Facebook are the cost of revenue as well as the research and development expenses. Cost of revenue is the spending on the creation and delivery of Facebook’s services to users around the world. Facebook’s cost of revenue in 2019 touched $12.8 billion compared to $9.4 billion in 2018. The sharp growth in cost of revenue is due to the fast growth in its user base. The research and development expenses of the company have also grown fast due to several factors. While there is a lot of competition from several other players including social media channels, gaming sites as well as entertainment sites, the company also needs to engage and retain users to grow its revenue. The research and development expenses of the company in 2019 reached $14 billion compared to $10.3 billion in 2018. The other leading category of operating expenses for the company are its marketing and sales expenses as well as general and administrative expenses. The marketing and sales expenses of Facebook also grew sharply in 2019 compared to the previous year which shows its aggressive focus on expanding its user base. In 2019, the marketing and sales expenses of the company grew to $9.9 billion as compared to $7.9 billion in the previous year. The general and administrative expenses of the company experienced even sharper growth in 2019 compared to the previous year, jumping by more than $7 billion. In 2019, the general and administrative expenses of the company were $10.5 billion compared to $3.5 billion in 2018 showing its fast expansion of operations. Overall, the company spent more than $46 billion in 2019 on its operations. However, the large operating expenses of the company also indicate its massive global presence.

Analysis of  Facebook’s Operations based on the 4Vs model:

Operations and operational processes are the fundamental building blocks of organizations.They have a significant influence on the productivity of the organization and quality of the output. Maximizing operational efficiency leads to faster market growth as well as growth in output. Many times, if the efficiency of operational processes is low, it is mainly because the organization has adopted a poor operational design. 

There can be significant differences in processes across different business organizations and industries. It is why all processes must be managed differently. Some of the leading differences between various processes are due to the technologies and the level of skills and know-how involved. Different processes require different equipment as well as different skills and know-how. However, apart from these things, the difference also lies in the nature of the demand for the products and services these processes produce. There are four specific characteristics of demand that have a significant impact on process management and which are as follows:

  • The volume of the products and services produced
  • Variety of products and services produced
  • Variation in the demand for products and services.
  • Degree of visibility that customers have of the production of products and services

Volume of products and services:

Does the given business produce a large amount of the same products and services or a vast range of different items in small volumes? For example, a car company will produce thousands of pieces of the same model.  On the other hand, a fashion brand will produce limited pieces of various designs. If the volume of output is high, it indicates repeatability or high-level familiarity of the processes. Many times a large business gains significant expertise in a particular area by producing more and more of the same thing. For example, Tesla which is a market leading brand of electric cars. It also helps businesses gain a significant competitive advantage compared to the other market players. In the internet services industry, the efficiency of processes can be much higher compared to regular businesses mainly because the same processes can be utilized to produce a very high volume of services. However, the complexity of skills and knowhow involved in operating these businesses can be very high. 

 Facebook is the largest social media network with more than 2.7 billion monthly active users as of the first quarter of 2020. The large user base of the social networking platform shows its strong market presence and the strong global network that has helped the business thrive and grow stronger financially. So, while the volume of output in case of Facebook is very high, the company is in a competitively strong position because of its expertise in the area. Apart from a network of data centers located in various corners of the globe that are required to run its services globally, the company has to invest in human resources mainly. Production of its services does not require a major change in business processes since nearly all kinds of users receive similar services. In this way, Facebook’s faster growth and high volume output proves the advantage that the leading players in the internet industry have compared to most other businesses.

Variety of processes (products and services produced):

 Variety is related to the various types of activities that are being performed by the company and how well it manages the various processes. The level of operational complexity is very high when it comes to a mixed model manufacturer that is engaged in lots of changeovers between processes. It means apart from having to choose from a very wide range of inputs, the company has to handle the additional complexity of matching specific customer requirements in terms of products and services. Generally, the high variety processes are more costly as compared to the lower variety processes.

While a wide variety of skills may be required to operate an extensive social media network like Facebook, the combination of processes involved is low. It is mainly because the company produces mostly services that are offered by computer engineers and developers mainly. However, unlike the physical hardware or automobile businesses, it does not have to utilize complex machinery or processes for the provision of these services. Customer requirements on social media and in terms of social media marketing are also generally similar. Everything on the network is based on algorithms and codes. Facebook is built on PHP, and it utilizes a compiler that turns PHP into native code for a performance boost. It also utilizes Mysql and Linux. Apart from that, the company uses systems like Haystack and Big Pipe. Haystack is a highly scalable object store that the company employs for serving a vast amount of photos. It also utilizes a large scale logging system called Scribe. However, apart from technology and innovation, the other areas are not highly complex. Facebook runs its business operations through data centers. Its business utilizes a mix of wide variety and low variety processes.

 Variation in demand of products and services:

Demand variation is among the most challenging aspects of business operations. It is easier for businesses to manage the processes when the level of demand is predictably constant. However, when demand can fluctuate significantly, then managing processes becomes somewhat complicated. If demand is predictably constant, it is easier to gear resources to cater to the existing demand efficiently. Moreover, businesses can plan operational activities, including marketing and sales, or after-sales services in advance.

On the other hand, if the level of demand varies significantly or can be highly variable or even unpredictable, then resources will need to be adjusted over time. What is even worse is that if demand can soar unpredictably, extra resources need to be devoted to the process such that it provides a capacity cushion that can easily absorb the unexpected demand. Let’s take a simple example of seasonal variations in retail and e-commerce. The demand for a broad range of products surges suddenly during the festive season, including gifts, electronics, home decor products as well as fashion products. Another critical factor that can cause a variation in demand for specific products and services is the level of competition in the market. If the overall level of competition in the market is very high, the companies have to care a lot to maintain the demand for their products and services, and that may require a considerable annual investment in marketing as well as technology.

As in the case of the internet, social media, and cloud technology services, they are consumed by individuals and corporate customers throughout the year. Social media services do not experience a significant seasonal variation in demand. The demand for Facebook’s services, while it has continued to surge over the past few years, they do not see any seasonal fluctuation in demand. The demand is not constant, however. It is because smartphone usage and the utilization of internet-based services continues to grow year over year. These factors have proved beneficial for Facebook, which continues to find growth at an explosive rate. However, this is also a significant competitive advantage that social media brands enjoy compared to physical brands.

Visibility of processes:

Visibility denotes that aspect of business operations that is easily visible to the customers. The businesses that work with consumers directly may have more visible processes. For example, the healthcare and retail industry have more visible processes. However, the same is not right about an automobile business. Customers generally do not have a clear view of the production and distribution processes of automobile brands. They cannot peep into everything that goes on before the finalized cars reach the showrooms. It is the only aspect of automobile operations visible to the public. It is also right about businesses like Apple inc. However, when it comes to companies like Amazon or even Facebook, these are highly customer-facing businesses, or customers have very high visibility into their operations. These are also some businesses for which transparency and accountability matters a lot. However, even in the physical retail industry, accountability and transparency have become of paramount importance because of the growing focus on the brand image as well as customer trust and customer experience.

Facebook is not just a highly visible business, but its high visibility has also subjected it to high-level government and public scrutiny. With the number of monthly users in billions, the company is enjoying exponential growth. However, while customers cannot generally have a glimpse into its internal operations like how its developers develop code at Facebook or how research & innovation happens inside the organization, the company’s external processes are still highly visible to customers. It also subjects the company to some significant challenges that are related to its brand image and compliance. With regards to data security and user privacy, the company has to behave with extreme caution since loss or exposure of user data or a hack into its information systems can expose the user data of billions of users worldwide.

Conclusion:- 

Facebook is a leading social media platform that has enjoyed immense growth in popularity and user base in recent years. Apart from growth in the number of Daily Active Users and Monthly Active Users, the Average Revenue Per User as well as total advertising revenue. Simultaneously the number of users accessing Facebook through mobile devices has also grown very large. A substantial part of the advertising revenue of Facebook is being generated from mobile devices. While the company has enjoyed profitable growth due to sharp growth in its user base, it is also spending a lot more on innovation as well as marketing. Operational costs have grown since a substantial part of the revenue is being invested in research and development and the headcount in various functions has also grown. Other challenges like higher regulation of the internet industry in US and Europe will also make the situation difficult for Facebook. Oculus has not seen any substantial growth or success either and advertising being the only major source of revenue, Facebook may want to find out newer channels for revenue and growth. 

Other Sources: Facebook Annual Report 2018 

Cite This.
APAPratap, A. (2019, March 2). Business Model of Facebook. Retrieved February 26, 2020, from https://notesmatic.com/2019/02/business-model-of-facebook/
MLAPratap, Abhijeet. Business Model of Facebook. 2 Mar. 2019, notesmatic.com/2019/02/business-model-of-facebook/. Accessed 26 Feb. 2020.
Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.