Important lessons about monetizing users from the Facebook IPO
The Facebook IPO has been the talk of the town and brought much chatter about the revenue model of Facebook. Yes, it’s an awesome application with staggering user growth but the money-men on Wall Street are also shining a light on the fundamentals of the Facebook business: specifically, Facebook is lagging far behind in terms of monetizing its users as compared to others in the Business. Google fetches about $28 per user per year, Facebook only fetches $4; and Fox can pull in 21 cents in advertising per eyeball for a single show, whereas Facebook pulls in only 3 cents in advertising per eyeball in a single day.
Of course Facebook is pitching that herein lies the growth opportunity. Fine, but what is Facebook doing to increase the average revenue per user? According to a recent article on CNN, the Facebook strategy to grow customer lifetime value is three-fold:
1. Hire success managers
Instead of hiring advertising sales people, Facebook is hiring customer success managers with MBAs and domain expertise to think with the customer about strategic ways to leverage the Facebook platform. These are consultants, not sales people.
2. Measure customer lifetime value
Customer lifetime value is a core metric. Revenue metrics are typically lagging indicators, but the average revenue per user or customer lifetime value is actually a leading indicator of customer profitability.
3. Focus on customer engagement
Active users are profitable users. Users who are most actively using the service, are also the ones that will generate the most revenues. Therefore, much of the product strategy of Facebook is geared toward driving user engagement.
Facebook is not alone in focusing on increasing the revenue per customer. In the recent book, “Inside Apple: How America’s Most Admired–and Secretive–Company Really Works”, Adam Lashinsky reveals that the main challenge for Apple is no longer acquiring new customers: many in the world already own at least one Apple product. Instead Apple is focused on selling more products to its existing customers. Enter the Genius Bar. At first glance a generous show of customer service, the Genius Bar is the source of many new product sales.
The very definition of a customer centric organization, as per the Wharton School of Business, is an organization that perceives and manages itself not as a group of products, territories and functions but as a portfolio of customers.
A bigger lesson we can all learn about this: the key to profits is no longer the customer acquisition we are all so focused on. For steady-state recurring revenue businesses, up to 80% of revenues can come from existing customers. In this brave new world, customer acquisition is necessary but not sufficient. The key differentiator in the future will be the ability to systematically grow the average revenue per user.
If there is one lesson to learn from the Facebook IPO then the importance of customer lifetime value, in addition to customer acquisition, would be it.