Facebook Inc to Small Biz: You Gotta Pay to Play

The social media giant wants to boost small business users, and tap into potential revenue the huge market offers.

May 23, 2014 at 5:30PM

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.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems, Facebook, and Twitter. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information