What it means
A social networking service is the company or platform that provides the network, in contrast to social networking, which is the activity people carry out on it. Users sign up, build a profile, follow or befriend others and post text, photos or video.
The more people join, the more valuable the service becomes to each of them, a pattern known as the network effect. The usual revenue model is advertising.
The service collects information on what users do and like, then sells advertisers access to specific groups of people. Other income comes from subscriptions, paid features, commissions on sales made through the platform and tools for businesses.
Costs are heavy at the start and then become relatively predictable. Building the software, running data centres, moderating content and employing engineers are the main expenses, and each extra user costs little to serve once the platform is up.
This is why successful services can reach high profit margins, while those that fail to grow struggle to cover their fixed costs. Investors judge these companies on user numbers and the revenue earned from each user.
Common measures are monthly active users, which counts the people who use the service in a month, and average revenue per user. A rise in one without the other can hide a problem, such as growing numbers of low-value users.
There are also risks that the numbers do not show. Users can drift to a rival service quickly, regulators may restrict how data is collected, and advertisers can withdraw if they are unhappy with the content.
These risks make forecasting harder than it appears. For a business customer, the service is a channel that must be compared with others.
The question is what it costs to reach a customer there against search advertising, email or events. A small test budget gives the answer more reliably than guesswork.
In practice
Real-world examples.
Example
A professional networking service charges recruiters for access to advanced search tools. Each recruiter pays a monthly fee that is recorded as subscription revenue. The finance team tracks how many pay each month and how many cancel. A rise in cancellations triggers a review of pricing and features.
Example
A photo-sharing service shows adverts between posts. It reports revenue per user to investors each quarter. A fall in the figure prompts questions about whether advertisers are paying less per view. The finance team checks this before updating its forecast.
Example
A local retailer buys adverts on a regional networking service aimed at neighbourhood groups. It targets people within five miles of its shop. The campaign is judged by the number of voucher codes redeemed. The owner compares the cost per redemption with her other advertising.
Formula
Calculation
Average revenue per user (ARPU) = total revenue / average number of users
Suppose a networking service earns $12,000,000 in a quarter from advertising and subscriptions. It has an average of 4,000,000 monthly active users during the period. ARPU = 12,000,000 / 4,000,000 = $3.00 for the quarter. If the cost of serving each user is $1.80, the quarterly profit contribution per user is 3.00 - 1.80 = $1.20, or 4,000,000 x 1.20 = $4,800,000 in total.Case study
Seen in the real world.
Hearthside Connect is an illustrative, fictional networking service for home cooks. It grew to 3,000,000 users in two years but earned just $0.50 of revenue per user, so it lost money despite its popularity.
The finance director studied the figures and found that most revenue came from a small group of heavy users who watched adverts and bought meal kits. She proposed a paid membership with ad-free browsing and exclusive recipes.
Within a year, 6% of users, or 180,000 people, had signed up at $5 a month, adding $900,000 a month in revenue. The illustrative lesson is that size alone does not make a service profitable, and that finding what users will pay for is the real work.
Watch out
Common mistakes.
- Assuming that a large user base means a profitable business, when revenue per user may be very low.
- Relying on a single platform to reach customers, which leaves the business exposed if rules or algorithms change.
- Overlooking data protection rules when collecting customer details through a service.
Questions
People also ask.
What does the abbreviation SNS stand for?
It stands for social networking service, which means the platform provider rather than the activity of networking itself.
How do these services make money if they are free?
Mostly from advertising, with additional income from subscriptions, paid tools for businesses and commissions on sales.
What is the network effect?
It is the way a service becomes more useful as more people join, which tends to favour the largest platforms and makes it hard for new rivals to compete.
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