Fair Trade: An Argument for Rewarding Users on Social Networks

Sure, social network traffic is booming and users are creating more and more content every day. But the hype is outpacing the value proposition for many marketers.

Sure, Facebook has a sky-high valuation, but how are advertisers—the source of Facebook’s revenue—faring? As advertisers go, so goes Facebook and social media in general. Their success is intertwined.

With all the traffic and activity, why aren’t we seeing more value from social media? It’s simple. Today’s business models aren’t creating the right conditions for growth and there are no proven ways to measure the success of a social media campaign. It’s new and everyone is still figuring it out.

Once upon a time, Web site owners made money in two ways. They posted content that attracted audiences and then sold advertising, or they sold stuff to users directly and made retail profit margins. One notable departure is eBay’s model, which makes money by facilitating transactions between peers.

In today’s Web 2.0 world, the same business models are being tried (eBay’s peer-to-peer model largely excepted). Social media business models will evolve to become more centered on the user. As incentives are created to compensate users for the content and audiences they create—and as effective metrics are developed, there will be a wave of innovation and marketing opportunity.

The trend has already started. Revver pays users for the videos they upload by giving them a cut of ad revenues. Sites like favoritethingz.com and mypicklist.com pay users for endorsements. SocialVibe enables users to get points based on social activity and donate them toward chosen causes. In many ways, it’s back to the future for content—users get paid for creating content. But what about advertising?

Sometime soon, a large-scale user-advertiser exchange will be created to pay users for the advertising inventory they create. This concept has been discussed before, but the timing may now be right for growth. No one knows exactly what kind of business models will result, but as social networks and application makers struggle to monetize their audience, the social media business model will evolve to more explicitly provide value to the consumer.

Several developments can be expected. Social media sites will prosper as parts of larger communities; interconnectedness and data portability between social utilities will improve; and consumer empowerment will be a key differentiator for social networks. Expect to see increased competitiveness and specialization among social media sites and utilities, each trying to differentiate the network through perks available to members. The fragmentation of social media implies four other effects:

1. Advertising networks that can effectively leverage social information will become marginally more important.

2. Widgets, as vehicles to carry a message effectively within and across various social media environments, will become more popular.

3. Exchanges or clearing houses will arise to provide compensation in some form (e.g., cash, rewards, points, status) for users.

4. Niche social media will become attractive places for brands to engage with consumers because relevance can be increased.

What does this mean? There are several potential ramifications for different constituencies:

Bids to monetize social activity. Marketers across the social media landscape will need to consider whether advertising alone is the best way to monetize social activity. Is there room for paid services or subscriptions? Do loyalty programs have a place?

Increased concentration on developing metrics. Advertisers will need to figure out how to measure the impact of their social media investment and how to effectively integrate it with their other marketing activities. Marketers need to prepare to deal with a fragmented spectrum of social media offerings—it’s not wise to bet on only one site. It also means preparing to identify and deal with stronger advertising networks.

Coping with empowered consumers. For publishers of social media sites, it means preparing for a world of empowered consumers who expect more perks to participate on a site and surrender valuable personal data. It means changing or adapting the business model so that they are not solely reliant on advertising for revenue.

Finding those who can find value in social media. For investors, it means focusing on ad networks that include social networking sites, effective widget developers, and the marketers that know how to use social media effectively. It also means that companies and new entrants that innovate on the social media business model (not just the technology platform alone) will be new sources of value creation.

Even as social networking makes arguably more headlines than any other form of online media, the advertising models that can work in that environment are still very much in their infancy. As they are built out, they will need to be quid pro quo, so that consumers—and not just advertisers and publishers—benefit.

Dave Friedman, president of the central region for Avenue A | Razorfish, is a monthly contributor to Chief Marketer. He may be reached at [email protected].