Since its IPO, Facebook (FB 2.15%) has struggled to prove to the world that its business offers tremendous growth potential in the years to come. This is not surprising, considering the company has had a difficult time increasing its average revenue per user (ARPU), perhaps the single most important metric for investors to follow. Despite first-quarter total revenue increasing by 38% year over year, ARPU only increased by 12%. The majority of revenue growth can be attributed to active user growth, which increased by 23% to 1.11 billion users. Eventually, Facebook will reach a point where user growth begins to slow, which should be when the focus will shift more toward ARPU.
Longer term, Facebook's greatest challenge is figuring out how to grow ARPU without detracting from the user experience. It's not as simple as slapping a few more banner ads on the site since that will likely detract from user engagement, which could negatively impact the number of marketing opportunities.
Just because Facebook has struggled with growing ARPU in the past, doesn't mean the company can't overcome it in the future. Below are three ways Facebook could breathe big life into ARPU.
Earn the trust of marketers
Facebook has made earning the trust of marketers a top-three priority. To that end, the company purchased Microsoft Atlas in an effort to bolster its advertising tracking technology. The thinking here is that the better Facebook can measure the effectiveness of a campaign, the more advertisers it can attract. The more advertisers it can attract, the higher prices it can charge. Keep in mind, this logic assumes Facebook's ecosystem is an effective advertising platform to begin with, which the verdict is still out on. I suppose we'll have to wait and see if Facebook can build the proof that social media is an advertising effective medium.
Go local
Given Facebook's massive scale and worldwide reach, the company is in a unique position to serve local markets. Additionally, the social network is home to 16 million small businesses, which could help improve the impact of going local.
If Facebook solicited the opinion of users who simply checked into restaurants or local businesses, it would likely make Yelp (YELP +0.90%) investors very nervous. Although it isn't necessarily a new idea for Facebook to go after Yelp customers, it's certainly a powerful one. With a database of more than 39 million reviews and counting, Yelp attracts 102 million unique visitors who are looking for trusted local businesses. With Facebook's scale, it could seemingly out-muscle Yelp in a heartbeat, which in turn could translate into higher user engagement.
Another localized area where Facebook could enter is commerce. If Facebook entered the daily deals market, how do you think Groupon (GRPN +4.10%) investors would react? My guess is not well, considering the daily deals purveyor has yet to earn a full-year profit throughout the company's existence. Despite the carnage, the company has begun venturing into the e-commerce market and has set a goal to become a $100 billion a year business. Since Groupon is likely preoccupied with its massive ambitions, it could be a great opportunity for Facebook to begin partnering with local merchants.
Perhaps more importantly than the fees generated from daily deals is how Facebook could begin changing the consumer mind-set that its brand isn't only a platform for communication and entertainment, but it's also a platform for commerce. This could go a long way toward driving higher marketing spend because companies could be inclined to pay more for advertising if they knew a user was more in the mood to buy.
Close that gaping hole
Frankly, the fact that Facebook is providing a free service for businesses to directly promote themselves to customers and potential customers is doing a disservice to investors. For the businesses that have organically built up a large Facebook following, there's little, if any, incentive for them to spend money on advertising. This could be why less than 6.25% of businesses on Facebook are currently active paying customers. If Facebook were to begin charging a monthly subscription fee for businesses with a large following, it could significantly drive new revenue growth while simultaneously locking businesses into the ecosystem that want a social media presence.
Pay up, marketers!
As I highlighted earlier, Facebook's greatest challenge is to grow ARPU without detracting from the user experience. The ideas I've suggested will help drive ARPU growth by putting the burden more on marketers and businesses rather than the user itself. In fact, if Facebook were to implement either of the localized suggestions, it would likely improve the user experience.
With a few relatively simple moves, it's become clear that Facebook has the power to potentially improve the long-term outlook for investors. Let's just hope someone's listening.
