Investors should always understand how the companies they're invested in make money. That might sound obvious, but the source of a company's revenue isn't always apparent. Take PayPal Holdings (PYPL 1.26%) and Pinterest (PINS 1.40%) as examples. In both cases, you likely know what the companies do. But since they offer their services to consumers for free, how do they make money?
PayPal and Pinterest are two examples of where the consumers are the product. In this video from Motley Fool Backstage Pass, recorded on Oct. 5, Motley Fool contributors Jon Quast and Jason Hall talk about what this means and why this makes both PayPal and Pinterest powerful platforms.
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Jason Hall: Jon, I know you've got a good one here and it's one of my favorites.
Jon Quast: I actually have two, Jason, if that's OK.
Hall: We're going to take the show with three Js and you're going to talk about, there's two stocks that start with P.
Quast: Yes, that's what we're doing here. The first one, it's similar to Jose's in the sense that it's a part of the business, it's not the whole business, but the company is PayPal. PayPal has over 400 million registered users, and they are the customers, but they're also the product going forward because PayPal also has over 30 million merchants on its platform and one of its main goals right now, it's trying to grow its user base, it's trying to get 750 million users by 2025. But it's trying to get them to transact more and more on the platform, that's why it's launching these new products and services like buy now, pay later; cryptocurrency; things like this. It wants to basically know all of the transactions, all the financial dealings of its consumers, because then it can take that data and give it to merchants.
The CEO of PayPal, this is what he said at an investor event and I quote, "We have a platform with hundreds of millions of consumers that are basically telling the merchant, 'Here's what I want.'" So the goal for PayPal now is to develop tools so that it can help merchants better sell their products and services to these consumers.
Hall: There you go. That says it. You want to talk the second one here or are you going to let me do it?
Quast: Yeah, Pinterest. So with Pinterest, this is my favorite company where the user is the product 100%. Let me share something here that I think really encapsulates what we're talking about here. This is called Pinterest Predicts, and this is based on search traffic inside the Pinterest platform. From emerging search trends, they make predictions on what are going to be big things in the year to come.
Over the last two years, 80% of the trends on Pinterest Predict turned out to be true. They're not batting a thousand but that is a pretty remarkable insight into consumer behavior that they can then take to their actual customers and that is the brands that want to advertise their goods on Pinterest's platform.
Pinterest can tell them exactly what consumers are looking for and what they might want. We predicted eight in 10 trends two years in a row, more eyeballs, more growth, more dimension, that's the power of Pinterest trends.
This is a very interesting platform in that sense, the more people that it gets on its platform looking for things, it is just incredibly insightful data that it can take to these brands and it's why it can charge such premium. It's why its ad rates are growing over time. Companies are recognizing that Pinterest actually really has a powerful platform in that sense.
Hall: Yeah, and I think, again, not to get too caught up in the Facebook discussion, but it seems like the business model of Pinterest, it just seems like it's easier to stay aligned with your users and your customers because people go to Pinterest, in a lot of ways, it's part of a transactional relationship. They're looking for ideas about things that they want to make, or maybe things that they want, like maybe a room they want to do a makeover of, so there's a transaction that's already associated with it. It does create that alignment where the process needs to be happy and comfortable. It's just the hell of a lot harder to rage scroll on Pinterest than rage scrolling on Facebook or Twitter or any of these platforms where you can spend 30 seconds and find a million things to be mad at and keep scrolling and get madder and madder.