Marketing assignment on: Social networking and market dynamics
Executive summary
Facebook has been a revolution in the arena of social networking. The company that was started just to build the online directory of college students turned out to be one of the fastest growing companies in a very short span of time. The study analyses the key factors behind its success, its revenue model and its offering in a brief. Like every business, the company is influenced by external market dynamics.
In order to analyse the effect of external market forces, Porter’s five force model is used to gauge the competitiveness of the company. The analysis points out that in spite of being a strong market player, the company still needs to counter the competition. The company is operating in a business field where its prospective clients have high bargaining power and the company has lesser. The competition is fierce and the entry and exit barriers are less; hence the company needs to tune itself with changing forces to sustain its growth in long run.
Introduction to Facebook business
Facebook came into being in year 2004. The idea behind the social networking site initiated with the concept of providing an online directory for college students containing basic information that can be retrieved anytime (McGirt, 2007). The idea accidently became a popular reality later on. The features like photo uploading went so popular among the college student that they started interacting through this website. In a way, it became a small networking platform at college level. But the site was successful to engage students in large numbers. Later on, its founder Mark Zuckerberg expanded its scale to bring more people interacting at one platform. Hence, the site became popular in the space of social networking.
Currently, the site has 552 million daily active users on average (Key Facts- Facebook Newsroom, 2012). The main revenue earning for Facebook comes from the advertising owing to its vast user base developed in short span of time.
Revenue Model
The funding of website was done from Venture Capitalists initially. The revenue model of the company is based on following (Francisco, 2006):
- Revenue from advertisements
Since the site has added considerable users across the geographies, it makes sense for businesses to advertise their business through Facebook. Facebook has provided various options like banner advertisements, customized advertisements at low prices etc. The revenue is directly proportional to the number of clicks on these advertisements.
- Virtual gifts
Some of the companies in the e-business domain prepare online virtual gifts and sell them at reasonable costs. That created a charm among many users and thus attracted revenues in this category.
- Sponsored pages
The businesses can promote themselves by creating sponsored dedicated Facebook pages. These pages can be promoted through viral marketing on various social networks. Hence, can be a less expensive yet more effective promotional media.
Porter’s five force analysis
The Porter’s five force analysis will help in understanding the market dynamics in social networking. The five forces determine the competitiveness of one player relative to other players and hence giving it more revenues from its users (Kotler & Kelly, 2008). Following are the five forces:
Threat of new entrants
When Facebook started its operations, it has few competitors in social network market. They were Orkut which was a market leader; MySpace and twitter which were emerging players. Facebook now enjoys a strong position in the social network market but lots of other small and big players are working hard to gather the market share. The entry barriers are believed to be very low as building a website is not a capital intensive activity and all one needs is an innovative idea and the art of selling that idea by promoting it. Hence any new e-commerce website can come up and attract the Facebook advertisers to its page if it is catering to the same business need as the advertiser does.
Buyer’s power
Since the market is flooded with online advertising portals as well as social networks, buyers i.e. the people who post advertisements have plenty of options through which they can promote their businesses. Although Facebook enjoys large user base yet there are social networks that have focussed user base and hence the quality of the users is as per the requirements of the businesses. The classic example in this context is of LinkedIn, which serves the professional community and hence a choice of platform for recruiters and other corporates. So, focused social networks give options to the advertisers giving them a position where they can negotiate the prices with the social networking companies.
It is therefore important for Facebook to keep such features on its website which attract vast advertisers. It may serve as mass promotional media and also should provide features for focused promotions. The customer segmentation based on geographies, demography and other useful data available to the site such as preferences of the users, kind of pages they visit, time they spend online etc. can help the company decide the features that can serve different types of business who want to advertise.
Threat of substitutes
It is clear that online market is fierce. There are new social networking and online advertising platforms coming up very frequently. The switching cost in this case is almost zero. The advertisers can find out the cheaper alternatives very easily. The examples of substitute products for a social network like Facebook are blogs, free website builders, affiliate websites, discussion forums etc. Although, the scale of these substitutes is very limited but they do provide cost efficiency. Since social networking is backed up by conventional promotional means, the advertiser may not be always willing to spend more budgets on social media and may switch to other options very easily.
The best way to counter this threat is to keep users engaged in the features by proving the effectiveness through statistics time and again. The company should resort to acquisitions of smaller players who bring up the substitute products in the market. A recent acquisition of instagram is one such step the company has undertaken. The key will also lie in innovation by building such products that provide easy options to create own promotional campaigns and thus keeping them engaged on the website. The company can offer e-commerce through its interface and hence compete with online marketing companies (Harris & Rae, 2009).
Supplier’s power
The supplier power in the online social network market is limited to a large extent. This is owing to the fact that the buyer has several options which can fetch him almost equivalent results in the short term. The competition in the market is also very big as there are websites who offer even free promotions. Building a loyal buyer in such a scenario is very difficult.
Facebook should therefore target multiple segments and keep on adding clients from various backgrounds. The most important clients will be the new businesses whether internet based or non-internet based; as they would like to reach to as many customers as possible at the start of the business operations. The company should keep a track of such businesses and approach them at the right time. Established businesses may not even need sponsored advertisements and hence the company can offer them affiliate marketing at cheaper price. The analysis of the user base of Facebook may reveal a lot of statistics that can attract advertisers who operate in particular customer segments. Hence, proper analysis and offering right service or feature to the proper client is the key to have a competitive edge (Doyle, 2007).
Competition
The most crucial factor that can affect the position of Facebook is the competitive rivalry. Its biggest competitor is Google which has been the most innovative player in the field of online businesses. In order to beat Facebook, Google has launched several products such as Google plus, Google adwords etc. The adwords work on same principle on which Facebook advertisements work i.e. Price per click. The adwords provides more detailed analysis based on SEO that can define the popularity of the website. Hence, more the innovation in this field more the competitive edge the site has. The other big competitor is twitter which has grown in a very short span of time. The strategy of twitter is that it can engage people in long discussions by posting relevant discussions in tune with the time and posted by celebrities. An example of focussed player but a big competitor is LinkedIn which is a social network for professionals. Apart from big players like these, there are small social networks, discussion forums, blogging sites and e-commerce websites are indirect competitors (Silverthorne, 2009).
Facebook can counter the competition by developing strategies according to the market needs. The company has got strong brand name and financial health. It can afford to spend on its growth activities by building new and innovative features in its webpages. It can also start a referral points system wherein it can give incentives to its existing advertisers who can refer to other businesses and hence expanding the client base of the company. It can also integrate various features like e-commerce, mobile commerce etc. in its pages and sell them to small businesses as their end-to-end sales solution (Lee & Benbasat, 2004). With strong financials, the company can acquire smaller players who may pose a competition to it and hence adding on to its capabilities for future. The modular architecture of Facebook webpages gives Facebook enough flexibility to add new features. The company should invest in hardware and regularly update its servers to cater to adding user base and demand. The performance of website should be robust as always it has been till now and that is the USP for Facebook.
Conclusion
The current study has suggested some of the business strategies that Facebook can undertake in order to remain competitive under the influence of market forces like low entry barriers, low customer switching costs, intense competition and less bargaining power. The company enjoys the advantage of large user base and thus needs to leverage upon it by innovating its offering in tune with market needs. Besides, having strong financials the company should resort to inorganic growth by acquiring small competitors to maintain its competitiveness in the market.
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