Facebook Inc to Small Biz: You Gotta Pay to Play

It's no secret that one of the most appealing aspects of Facebook (NASDAQ: FB  ) is its proven ability to charge advertisers what amounts to a small fortune. The reams of data the social media king collects and utilizes to target ads is a marketing department's dream, and warrant the higher fees. Facebook's ability to generate advertising results is just one of the differences between it and other social media sites like Twitter (NYSE: TWTR  ) . Razor-sharp targeting is also why some industry pundits suggest it will charge as much as $1 million a day for its soon -to-be-mainstream video ads.

With a price tag anywhere close to the rumored $1 million, only the biggest of the big hitters will be in a position to utilize Facebook's video ads. Why then, would Facebook make a push to bring small business owners into the advertising fold, as its doing with the recently announced, nationwide Fit initiative? The timing of Facebook's focus on small business owners is intriguing considering it irked many late last year when it made the decision to limit the "organic reach" of posts. But as usual, there's method to Facebook CEO Mark Zuckerberg's madness.

How big is big?
The sheer volume of small businesses in the U.S. is one reason for Facebook's latest monetization effort. According to the Small Business Administration (SBA), there are 23 million small businesses in the U.S., which account for 54% of domestic sales. That's a lot of potential clients for Facebook, and the incremental revenue it will derive from its new focus on mom and pop shops around the country could begin to add up.

But let's face it, with advertising alternatives beginning at a meager $10 a shot , it's going to take a whole lot of small businesses to make the nationwide Fit workshops Facebook is planning worthwhile. That is, if the $10 ads were the only benefit Facebook will derive from implementing Fit. As it turns out, there are other, more profitable ways to generate revenue from the legions of small businesses.

Now, the rest of the story
When Facebook tweaked its algorithm in Dec. of 2013 to effectively limit how many people saw posts, small business owners were immediately affected. Why? Many small businesses, in lieu of actually paying a web designer and Internet hosting company, use Facebook as their business website. Anytime a company, in this case Facebook, begins charging for something users have been getting for free, there's bound to be some pushback.

Facebook hopes that by lowering the barrier of entry, and at $10 an ad that's not much of a barrier, small businesses, like their corporate cousins, will begin to see the benefit of Facebook as a marketing tool. The objective is to let business owners test the advertising waters, and then step-up to higher cost, higher return alternatives.

But even with 23 million potential clients, it's likely the incremental ad revenue isn't where Facebook will see the highest return on investment of its Fit initiative. In Q1 of this year, according to a recent study conducted by Adobe, Facebook generated $1.24 for every referral to an online retail site. That's 11% higher than the year-ago quarter, and twice Twitter's $0.62 per referral. Which speaks volumes about the languishing Twitter, considering it's in the early stages of its growth phase. Despite Twitter's relative youth, it improved its per-user referral value a meager 5% year-over-year. Add in Twitter's slowing user growth, especially considering its early stage, and it's not even in the same ballpark as Facebook.

Another revenue source from Fit, albeit indirect, will be the bevy of small business owners marketing Facebook to their customers. Facebook can then utilize the additional data to target ads even better than it already does, resulting in higher advertising costs. Facebook knows and loves data, and Fit will bring more small businesses into the fold, and that means more user information. Perfect.

Final Foolish thoughts
As discussed in a recent article, about the only thing Facebook and Twitter have in common is their industry, and both stock prices move hand-in-hand, at least in the short-term. But as its Fit initiative demonstrates, the two are pursuing very different strategies and Facebook could be on its way to solidifying its standing as a dominant social media company with a solid business model. Yes, small business owners may grumble that they have to pay to play with this new initiative, but you can bet grumbling stops when Facebook makes it worth their while.

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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