Primary Monetization Model for Social Media: Advertising

If it wasn’t clear enough, advertising is the core source of revenue for all companies in the social web. As I wrote this morning, advertisers provide “the revenue for four out of the five primary types of companies in the social web economy”. In another article posted this morning on Alley Insider, Vasanth Sridharan revealed that RockYou will begin launching advertisements from car advertisers.

Car advertisers are some of the largest advertising spenders in the U.S. In the first quarter of 2008, General Motors spent $536.5 million, Toyota Motors spent $350.4 million and Ford Motors spent $330.2 million on advertising according to Nielsen Monitor-plus. The auto industry was also one of the first entrants into banner advertising and they are also one of the early entrants into social media.

What Matters More: Monetization or Users?

One of the classic statements in the social web industry is “our company is not currently focused on monetization”. The creators of technology products love to spend time focusing on refining their products while building the user base. In the early stage this makes a lot of sense because if only a few thousand users are coming to your site, it doesn’t really make much sense to try to generate revenue.

The strategy of “grow first, monetize later” seems to make sense for a lot of venture-backed companies because they have the luxury of time. Unfortunately though, I really don’t think these companies have as much time as they think. In a world of limitless inventory, investing the majority of a company’s resources in building more inventory doesn’t seem to make much sense.

Social Media Advertising is Nascent

This industry is still young though and advertisers are slowly (extremely slowly) beginning to understand what social media has to offer them. Spending money on a television advertisement does not generate as much interaction with your end consumer. As such we are seeing a number of creative ways to advertise in social media.

At the end of the day though, isn’t advertising just advertising? Advertisers want to invest money in promoting their products and services and they want some way of justifying their expenditures. Early on, social media campaigns provided little data in terms of return-on-equity (ROI). We are beginning to see that change though as new social analytics companies emerge and new forms of metrics generated.

It’s time for social media companies to invest more time in developing advertising solutions rather than their user base. Until someone comes up with a new way of making money through social media, it’s the only way to generate revenue.

Create a social media strategy, launch your campaign, and track the results in our Social Media Marketing Boot Camp starting February 16. The online event and workshop will feature speakers including Morin Oluwole (Facebook), Michael Brito (Edelman Digital), and Tim Devane (bitly).   Register now.