How Did Facebook Build It’s Sustainable Competitive Advantage?-Business Strategy & The Success Story
The year 2004 — MySpace and Friendster were fighting against time to become a world’s dominant social network. Both the websites already had millions of members. Another website, Orkut, backed by Google, was making rapid inroads into the social networking sphere. These companies had money and people to conquer the world. At this time, a group of college students headed by a person named Zuckerberg launched a social networking site called Thefacebook from his dormitory room. It started as a college student’s passion project, and it went on to become one of the internet’s wild success stories. The new website attracted seven million users in its first two years of existence.
In the following decade, while all the other social websites vanished, Facebook continued to move up and became a monopoly. The site changed the way people interacted with one another, how companies did business, and how they spent their ad budgets.
What were the reasons behind Facebook’s growth? How did the brand build its sustainable competitive advantage?
Note: The following content is mainly from the book ‘‘The Facebook Effect” by David Kirkpatrick.
1.0 BRAND POSITIONING — Niche, Positioning, Value Propositions,
The first step in building a sustainable business is to position your brand inside a consumer’s mind. The ways to enter their mind is
a) Becoming a leader in an existing product/service category(It would need massive investments in money, effort & time and not a practical option)
b) Becoming first in any new product/service category. In other words, you need to create a new listing.
If you plan to create a new category, then the conventional wisdom is to look for a niche market.
Finding a Niche Market — The general rule is to start small. Focus on a particular need, work on it, make your product distinctive, and dominate the niche market. Narrower the segment, it is easier for the entire company to focus and meet the customer needs, wants, and desires. Once you become a leader in the niche market, you could grow your market.
1.1 FACEBOOK’S NICHE MARKET
From his school days, Zuckerberg had been building web applications with social components. He loved solving problems through programming. He always wanted to be occupied with some challenging projects.
At Harvard, Zuckerberg developed web applications called Coursematch, Facesmash, Study-aid, Six Degrees, and Synapse. Course match and Facesmash were runway hits.
Solve A Customer’s Pain — Zuckerberg did Coursematch to help students pick classes based on who else was taking them. It went viral. Hundreds of students used the program and found it very useful. The web application met one of the user’s hidden needs.
A product or service should enter a market to solve a problem.
The success had prompted Zuckerberg to explore opportunities.
THE STORY OF CHOOSING A NICHE MARKET
The Exposition — Harvard had a student register called Facebook, featuring primary information and photos. Every year, the institution customarily printed the directory. Studying those photos on the list was a frequent recreational activity for most of the students.
(Earlier, Zuckerberg illegally used the data from that directory for developing his Facesmash application and faced disciplinary action on account of breaching privacy).
The Rising Action — Several students were requesting the institute to publish the student directory on the internet — An online Facebook. They felt that an electronic Facebook for the entire college would be both helpful and entertaining for all. Though the institute agreed principally, the project never took off.
The Denouement — Harvard’s student newspaper, Crimson, also supported students’ views. In one of the editions, they wrote that if a student could create Facemash, there was no reason a programmer couldn’t build a Facebook. The article laid out likely user requirements for such a website(It helped Zuckerberg when he was developing the Facebook). The newspaper also emphasized that the students should have control over the sharing of their information. The editors added that the best way would be to let the students upload the data themselves. Crimson also wrote that Zuckerberg would have avoided disciplinary action in the case of Facesmash if he had limited the application to students who would voluntarily upload their photos.
The Solution — Zuckerberg, being a student himself, was aware of the needs of fellow friends. So, he was already thinking of creating an online directory based on authentic details about students. Crimson’s editorials came at the right time and gave him valuable inputs. With those inputs, Zuckerberg began his journey of building the Facebook website.
Zuckerberg took several elements from his earlier works such as Facemash, Coursematch, and Synapse for building the website. He also adopted some features from a famous social networking website of that time, Friendster.
The Journey — Thus, in February 2004, Zuckerberg and his friends launched Thefacebook.com. It’s target customers were students from Harvard University who had Harvard.edu email address. People joined the site through invitation only. After launch, the site encountered a viral explosion. Thefacebook became the main topic of discussion in Harvard dining halls, classes, and other meetup places.
After the initial success, Zuckerberg opened Thefacebook to students at Columbia University on February 25, to Stanford the next day, and to Yale on the 29th. Everywhere, the website continued its viral growth. Later, Zuckerberg extended to other colleges and universities.
So, initially, Facebook’s niche target customers were young students from elite universities and colleges — The Millennials.
Why Millenials Were The Right Target Segment?
Millennials were a precious demographic, and they have played a critical role in Facebook’s success.
- For succeeding in any business, the primary rule is to have a sound knowledge of the target customer’s needs, pains, and desires. Zuckerberg, being a student himself, was well aware of the other student’s needs, likings, dislikings, and other factors. It helped him in designing a site that not only met student’s needs but also spoke in their language.
- Millenials mingle and interact with fellow students more than any other market segment. The college has the right environment for socialization. Any student would be within two or three degrees of everybody else on a given campus. A social network’s user experience depends on the number of known people joining the website.
- Millennials are open to a greater sense of adventure — They would happily explore new products/services.
- Millennials are also called as Digital Natives as they grew up interacting with the virtual world. So, they would find it easier to use a Facebook website than any other segment.
- Millennials are trendsetters. The Early Majority segment follows what millennials do.
- In college, most of the millennials develop life-long habits. When a company onboards a customer who is in college, it means that they have got a life-long customer.
Zuckerberg was fortunate in choosing millennials as a target segment.
1.2 CREATING A CATEGORY & VALUE PROPOSITIONS
After choosing the niche customer segment, it’s time to create a category to establish positioning.
Creating A Category — A category is defined based on the brand’s value propositions. So, what value propositions did Facebook offer in the beginning? How were they different from other social networking sites?
When Zuckerberg launched Facebook, he wanted the site not to be a dating site like Friendster but a communication tool for the students.
Facebook’s initial objective was to help people share information at Harvard. Students could inform the happenings within the campus, about the courses, parties, study materials, and other essential things. Several people created study groups for classes. A few students used the site to arrange meetings for clubs.
Facebook also helped a student to host status messages about himself/herself so that his/her friends could keep track of him/her.
However, as more users joined the website, the value proposition began to evolve. Within a few months, another value proposition became the core of Facebook’s offerings. Let’s see about that.
SELF AND SOCIAL IDENTITY
Bowerbirds, one of the amazing creatures on our planet, could be found across the forests and shrublands of Australia and New Guinea. They are famous for their unique courtship behavior, where males build an elaborate nest and decorate it with sticks and visually fascinating, brightly colored objects(rare to find things). The nests vary in different shapes and sizes. Some of the structures rise to nine feet off the ground.
The Bowerbird works hard in differentiating the nest from other nests by decorating it through painting and arranging the objects. These nests serve only one purpose — to attract females. They will not be used by females to lay eggs or raise young ones.
The nest is a way of showing the male’s uniqueness among its peers to the potential female bird. The bird is in a rat race to build an identity and show it off.
THE IDENTITY — We, humans, are also in a rat race to build a nest of social status, a unique identity & show it off to others to attract power, favor, or mate(s) and all our public purchases/consumption/behavior is a way of achieving those goals. Facebook exploited this evolutionary behavior of humans.
The social networking website sold an identity — It allowed everyone to build a nest of social status and broadcast it off to people. It’s not about what Facebook can do for the customer, but what customers can do with Facebook.
A person may say that he or she buys things for personal enjoyment or personal needs and not for showing off but research shows the opposite.
Though Zuckerberg started the Facebook project as a communication means(a way to help people share more at Harvard), users began to use it as a tool for Self Expression — They recognized that they could project multiple aspects of their self, hitherto unknown to other people.
How did a user build an identity on Facebook? — Even though the earlier website didn’t have enough tools or features, people found creative ways to project a better version of themselves.
- Photos — Students hated their photos in Harvard’s directory that was taken by college photographers. It had below-par light and was unattractive. On Facebook, they had the freedom to decide what kind of image they wanted to share. The students began uploading and changing their photos frequently. Most of them chose images in a way to reinforce their identity. Friend’s responses to those photos had also increased their self-esteem.
- Profile — Profile information was another element that helped in constructing an identity. It allowed students to broadcast information about their work, political thoughts, hobbies, favorite books/shows/movies, relationships, nicknames, and other details. It was a tool that projected one’s likes, dislikes, and desires.
- Status Message — Another feature that students used extensively to steer and strengthen the identity was Facebook’s status message. Most of the students creatively used it to relay a political opinion or humor or practical information or life experiences or something else about self. More than any other feature, the status message became an essential ingredient in building the identity.
- Comments — Users also made conscious choices about what to comment on friends’ profiles and status messages as it had to be consistent with the identity they were trying to build.
- Competing For Friends — Initially, when a student joined, he/she found that the visible extension of his/her social network conferred a higher status to his/her identity. So, students competed for friending as many as people. He/She also realized that tweaking the profile would help in attracting more friends. Let others be proud to become friends with you. So, students spent considerable time in building/updating the profile.
Through the profile information, photos, and status messages, students constructed a self and social identity. It revolved around what he/she thought about who they are and how others should judge them.
For a student, Facebook was about showing the world about him/her and how he/she is different from others.
Identity For Adults — Though Zuckerberg opened Facebook to other user segments, the core value proposition of building an identity remained the same.
My Identity — I’m a designer, part-time business strategy blogger, husband to a scientist, doting father of a young girl, home-maker, and avid reader. When I meet other designers, I discussed only Design. When I meet marketing people from other companies, I have discussed business strategies and not design. My daughter’s friends’ parents have seen a different side of me. But on Facebook, everything is revealed. All my multiple identities merged into a single identity.
Facebook is about revealing one’s true identity. When people argued that adult users should have both a work profile and a fun social profile, Zuckerberg replied, “The days of you having a different image for your work friends or co-workers and for the other people you know are probably coming to an end. Having two identities for yourself is an example of a lack of integrity.” He also believes that by openly acknowledging who we are and behaving consistently among all our friends, we will help create a healthier society. Zuckerberg adds that people will be held to the consequences of their actions and be more likely to behave responsibly.
ACTIVITIES AND THE STRATEGIC FIT
Now, the next crucial part — To deliver the proposed value proposition to a customer through a product/service, a brand/company has to perform specific actions.
Example — To deliver the value proposition of Authentic Coffee, Starbucks performs the following activities — Sourcing of quality coffee beans, Roasting, Customer Education, Baristas training, Consumer Research, R&D, Hiring, Procurement, Testing, Real Estate, Packaging, and Branding. All the above activities complement, enhance, and reinforce each other, forming an interlinked chain.
Let’s see some of Facebook’s activities that helped Facebook in building a sustainable competitive advantage?
Before moving ahead, let’s briefly understand how a brand chooses an activity and what is meant by strategic fit.
How a company/brand chooses an activity?
A company will only choose activities that would contribute directly to the value proposition. It would skip the activities that won’t enhance or add value to the value proposition. The company would also eliminate activities that affect the core value proposition.
STRATEGIC FIT — For a business to establish a sustainable competitive advantage, the chosen activities should interact, complement, enhance, and reinforce one another. It is called ‘Strategic Fit’ among activities. The ‘fit’ determines the brand’s success.
2.0 GROWTH EXPANSION STRATEGY
Facebook was fortunate to enter late in the social networking market. It could learn valuable lessons from the previous entrants’ failures and take preventive steps to avoid them. One such wisdom had played a massive role in the website’s success.
The Crisis —By the time of Facebook’s launch, Friendster and MySpace, who had millions of users until then, began to face a crucial hurdle that led them to fall out of favor with customers. The sites faced performance problems. It was the main reason behind those site’s downfall. As millions joined Friendster, the company’s servers couldn’t manage. Users felt frequent blackouts and slow loading pages — The user experience went downhill quickly. The frustration mounted. Even Orkut, though backed by Google, struggled from performance issues.
The Denouement — Zuckerberg, having used Friendster for some time, was well aware of the performance problems. He understood that consistent user experience would be the most critical factor in Facebook’s long-term success. From the beginning, Zuckerberg explored the ways to avoid those performance issues.
The Solution — Zuckerberg adopted a multi-pronged strategy to avoid performance issues.
Zuckerberg’s team knew that whenever Facebook entered a new college, the traffic surged as fresh users rushed in. After some time, the traffic would stabilize and level off. So, Zuckerberg decided to pace the market expansion in steps. Before expanding to a new college, he would add servers, upgrade the database in such a way that it could accommodate ten times more users than Facebook had at that time. Later, Zuckerberg would wait until the new user influx reaches a plateau, and then would plan for expanding to the next university. This way, he could expand quickly to other colleges without compromising user experience. It was one of the critical reasons why students stopped using Friendster/MySpace and adopted Facebook within a short time.
CROSSING THE CHASM-EXPANSION STRATEGY — Another factor that contributed to Facebook’s success was its rapid expansion strategy.
Zuckerberg began receiving several requests from other students to bring Facebook to their colleges. When the calls touched 20000 users from a particular institution, he introduced Facebook to them. It led to quicker leveling off of traffic on servers, thereby freeing the company to focus on expanding to other colleges. Zuckerberg had allowed the students’ interests in Facebook to reach a critical mass before leveraging it.
LEVERAGING INFLUENCERS — Facebook’s expansion strategy also got a timely boost by the presence of Zuckerberg and his team’s friends in other colleges where they had planned to expand. Fortunately, most of those friends were one of the influencers in their institutes. They leveraged their power to promote Facebook. At Dartmouth, one of Zuckerberg’s school mates was studying there. He was also chair of the Student Assembly’s Services Committee. The friend promoted the site to all students using the assembly’s email system. It resulted in almost half of the college students registering on Facebook within a day.
INTUITIVE DESIGN — One more factor that helped in rapid Facebook adoption was its intuitive interface design. The initial Facebook page had an uncluttered layout with easy to understand menus and hierarchically arranged information. When a user saw the site first time, he/she could understand and use the website immediately without consciously thinking about how to perform a specific task.
Facebook spoke the student’s language and took the guesswork out of the user’s mind. People could focus on the task at hand.
HUB AND SPOKE STRATEGY — As months passed, Zuckerberg introduced another expansion strategy called Target The Surroundings. Under this idea, when they launched Facebook in a new college, they would also allow other institutes in the nearby region to access the site and use it. Zuckerberg believed that such a strategy would create a cross-network pressure, leading students at the original school to prefer Facebook as the only sole social networking site.
Zuckerberg’s hub and spoke strategy also helped in Facebook’s rapid expansion among the students.
3.0 LOW CAPITAL EXPENDITURE(CapEx)
In 1997, Andrew Weinreich launched a social networking website called sixdegrees.com. It was the first social media network to allow users to create a profile, see their list of friends, and also search for them. At one time, the company had around one hundred employees and 3,500,000 registered members. However, the site was shut down by 2000. The company failed to generate enough revenue to sustain itself and got swallowed up by the dot com bubble.
The Crisis — One of the critical reasons behind the SixDegree’s failure was its high capital investments. The company had to buy expensive servers and database software licenses from Oracle. It also had to pay millions to web-development firms and other companies. On account of this, the company incurred a massive capital expenditure. It meant that the brand would take a longer time to realize the Return On Investment. Andrew has launched the Six Degrees website at the wrong time, where open-source software was at infancy.
The Path — However, things started to change after 2001. Frustrated by the unfair profits garnered by closed-source software companies, a group of developers began to collaborate and author open-source software. They tweaked, improved, and enhanced it. By 2004, the software had become mature, robust, and flexible. That helped people like Zuckerberg to continue developing several web applications.
The Difference —Zuckerberg built Facebook entirely from open-source software — MySQL database and Apache Web Server tools. He did not need to purchase any software. By 2004, the price of servers also went down drastically. Zuckerberg could maintain the site at the cost of only eighty-five dollars per month. It was cheap to provide the service. That was the reason why he could keep Facebook without any ads for a while and maintain user experience.
Without open-source software and cheaper servers, Zuckerberg would not have been able to create a fully-featured website from the dormitory room.
4.0 BUILDING A HABIT
In a day, millions of people spend several hours on Facebook. Many of them check their Social Networking website as soon as they wake up every morning. Studies show that millions of people check their Facebook multiple times a day. They use the product on their own, again and again, without any coercive calls from the site.
Facebooking has become a habit. It was one high impact factor for the site’s success.
A company that encourages a habit formation would gain higher customer lifetime value. It builds loyalty and establishes a strong competitive advantage that the competitors would find difficult to break.
How did Facebook develop a habit among its users?
What factors played a pivotal role in building the habit?
4.1 TIME INVESTMENT
Nir Eyal writes that the more time and effort a user invests in a product or service or activity, the more he/she values it.
- In 2011, Dan Ariely and Michael Norton conducted a study to prove it -A group of students were given the task of assembling an origami crane and asked them to specify a price to purchase their creation. The research team asked another group of students (They were unaware of who made the origami) to bid on the origami. The results showed that those who made their creation valued their work five times higher than the second group’s valuation.
- In another experiment, researchers gave a prize to a group of students on completion of a task where they had to exert effort. Then, the study team gave the same product free to another group that was named the Non-Effort group. The experimenters then invited the two groups to specify a price at which they would be willing to sell. As expected, the students who put effort developed a sense of attachment to the product and was not interested in giving it away. Some of them priced higher than the price quoted by the second group.
It is also widely called the IKEA effect — IKEA exploits the hidden benefit of making the customers invest their physical effort and time in assembling the products which they buy — As customers build the product, they began to love their furniture and value it more than its objective value. Thus IKEA builds its brand loyalty.
The above studies show that the way to build a loyal customer base is to provide opportunities for a user to spend more time with your product/service.
Facebook & Time Investment —Initially, on Facebook, students didn’t have much to do other than looking at other’s profiles, read status messages, maintain their account, add friends, and poke people. Except for the status messages, no frequent changes were happening on the site. It wasn’t engaging enough. Users didn’t have enough reasons to log in frequently or spend more time on the site.
Zuckerberg and his team changed that. They introduced a series of features that not only encouraged people to spend more time but also made them addictive.
Let’s see some of those features.
4.1a PHOTOS AND TAGS — Time Investment
The first feature that helped Facebook to race ahead of the other social networking sites was the introduction of photo albums.
Observing Customers — After launching the site, Zuckerberg and his team continuously monitored users’ behavior for valuable insights/patterns. They steadily learned the customer’s evolving needs. Zuckerberg used that knowledge in tweaking the Facebook design to meet those requirements. One of those observations led to the introduction of photo albums.
Research Insights — During the research, Zuckerberg and his team observed that though the students were allowed to have only one profile photo, they were frequently changing it. A few people changed the images more than once a day. The team did in-depth research and found out that customers wanted to post more photos. It was a way to show their identity.
At the same time, Zuckerberg and his team observed that photo hosting was mushrooming all over the internet. Websites like Flickr attracted a massive amount of customers.
The Launch — After a lengthy debate on the strategic necessity of getting into photo hosting and storage business, Zuckerberg and his team introduced the album feature. It allowed users to upload photos and include them in online albums and enabled others to comment on them.
The Spotlight — During this time, Facebook’s team observed a critical reason behind the Flickr website’s success. It was their new feature called “tagging on photos” — It allowed users to search for photos based on the tags. It revolutionized the photo hosting service.
One of Zuckerberg’s teammates, Hirsch, suggested an idea — He said, “You know, the thing I most care about in photos is, like… who’s in them.”
That turned out to be the breakthrough idea for Facebook.
Facebook introduced the feature where the names of the people could be tagged, and the marked person would receive an alert message. It was a first of its kind in the social media market.
After launching the tag feature, the uploading of photos exploded. The users saw it as an opportunity to convey a message, exhibit friendship, and more. Images became a form of communication.
David Kirkpatrick writes that photos had become, in effect, more articulate.
Flow State — Facebook also launched an album feature that would encourage customers to spend more time. They made it easy to see other photos — A user has to click anywhere on the picture to see the next one. Glancing at images became addictive. People kept clicking through the photos.
Facebook also compressed the uploaded images into smaller digital files. It allowed quicker loading of files that ensured continuous clicking through the photos.
Within a short time, Facebook became the most popular site for photos on the internet.
The launch of the Photos feature gave users reasons to visit Facebook frequently. The chances of finding something new was high.
4.1b NEWS FEED — Time Investment
The Crisis — The album innovation was good. Still, competitors could easily copy it. Also, as time passes, the photos, once engaging in the beginning, would no longer be attractive in the same way. It would become predictable after some time. After the initial rush, people might stop uploading photos frequently.
The Denouement — Facebook needed something that could exercise a disproportionate influence on people to stay on the website for hours to develop a habit. The site has to break the predictability — Something variable to hold their attention.
One reason why people are addicted to slot machines was that they never know when they will win a jackpot. The variability draws them to keep playing.
So, to develop a habit, Zuckerberg needed to provide variable rewards to users — In other words, variable information.
Observing Customers & Research Insights — We have already seen that Zuckerberg’s team continuously observed and analyzed users’ behavior.
While observing, the team got the following insight —
- Several users often visited another person’s profile to know what was new. They wanted to know what’s happening in another person’s life. Unfortunately, the activity was a tedious one and consumed time. Facebook introduced a feature called Timeshorting. It showed which profiles had changed recently. Zuckerberg observed that whenever someone changed their profile picture, it resulted in increased page views. However, the new feature gave information only about the profile changes.
One day, Zuckerberg thought — How about bringing those profile changes to a user rather than the customer going and searching for that information? That would drastically reduce the time and effort. Habit formation also depends on how effectively a brand could reduce the steps a user had to take to accomplish the task.
The Solution —How to bring the information to users? The answer was to build a page that showed not only the latest photos your friends had added but all the things that had recently changed on the profiles of your friends. It would show what friends liked/commented on or the group they have joined. Facebook called it NEWS FEED.
The new tool would help users find the information that they wanted, all in one place.
The Hurdles — However, Zuckerberg and his team faced several hurdles in developing the News Feed feature — It was the greatest coding challenge the company had ever encountered. The tool has to understand the user’s behavior and customize the content, as we all differ in our likes/dislikes/desires/needs. An average user had hundreds of friends. Observing everyone’s every action and ranking them was almost an impossible task. The team worked hard for months to implement the feature.
The News Feed Feature —
- News Feed highlights what’s happening in each person’s profile — updates personalized stories throughout the day — Instead of you sending information about you, you update about yourself on the site, and Facebook would push the content to your friends.
- The form of automated communications made it possible to stay in touch with many people simultaneously with a minimum of effort. It was making a big world smaller.
- News Feed showed trends around a user.
- It enabled dramatic reach of the posts — It began an era of Viral Explosion.
- News Feed allowed everyone to see what a person is doing. It made people conscious of their actions. It pushed people to become consistent in their behavior.
The News Feed Algorithm — The algorithm’s objective was to inform and entertain a user by prioritizing meaningful and engaging content, particularly from friends and family. The News Feed code also ranked content on several other factors — posts that receive a lot of likes, comments, or shares within a short time — people’s preferences — localized content — bounce rate — posts that spark meaningful interaction — the presence of clickbait — reliability and relevance.
Facebook has continuously tweaked, honed, tested, and improved its News Feed algorithm to organize friends’ information engagingly. Eventually, it became a strong competitive advantage for the brand.
Data-Enabled Learning — As the News Feed algorithm collects behavior data and learns from it, it quickly incorporates those lessons to customize a better experience for other similar users. As content increases, the user experience improves, bringing more users to the site. The News Feed, coupled with data-enabled learning, has set Network Effects in motion.
The user-generated content/data makes it difficult for a competitor to copy the News Feed feature. It acts as a strong entry barrier for competitors.
News Feed transformed Facebook and became the epicenter of the website’s success.
4.1c PLATFORMS — Time Investment
Guy Kawasaki once said that Macintosh would have vanished in the mid-80s if not for the presence of a single piece of third-party software called Aldus Pagemaker, one of the first visual page-layout programs for personal computers. PageMaker and the Mac, coupled with the Apple LaserWriter, disrupted three industries — advertising, marketing, and publishing. Similarly, another third party app called VisiCalc, the world’s first spreadsheet program became so popular that it drove demand for the Apple II hardware.
Products produce a single revenue stream, while a platform give manifold opportunities. It also brings multiple distinct groups of users to the brand.
In the mid-80s, realizing the limitations of developing application software, and after observing the benefits of third-party applications, computer companies actively promoted application developers. They strongly felt that allowing third-party developers to build programs on their platform would help in rapid business growth.
Platforms played a critical role in Microsoft and iPhone’s successes.
Facebook As A Platform — From 2004, Zuckerberg had been thinking about turning Facebook into a platform where others could deploy software, much like Microsoft’s Windows or the Apple Macintosh, which hosts third-party applications. He wanted to create a standard software infrastructure that would make it easier to build applications relying on social interactions. Zuckerberg was waiting for the right time to launch the platform model.
For launching a platform, the social networking site had to meet certain conditions —
- A great platform starts with an exceptional product —By 2007, Facebook, on its own, was a great product. Users loved it. Photos and events were going viral — News Feed was keeping the users engaged. So, Facebook’s service was the primary attraction. The social networking site met the first condition.
- A critical mass of customers —By 2007, News-Feed ensured people stay for hours on Facebook, going through the content. Millions of customers were coming back multiple times within a day. The presence of repeat users would make the potential platform attractive to third-party vendors. The platform has to create value for everyone.
- The News Feed —The platform should have a feedback loop algorithm to collect continuous user behavior and use it to improve the application, which would attract more new users. Facebook’s News Feed algorithm’s primary task is to monitor user behavior, gather insights, and apply it to organize the content. So, Facebook already has the required feedback loop feature to make the platform a success.
- Virality — Third-party vendors would like to gain value from the platform as early as possible. One of the things they look at is Virality. Facebook had answers for that — The core value of Facebook is in the set of friend and family connections. Zuckerberg and his team call it Social Graph. It is the most powerful distribution mechanism for distributing information. The photos feature became famous by exploiting this mechanism. Another factor that helped in virality is the News Feed. This feature gave a new meaning to virality.
The Launch —In 2007, Zuckerberg’s team introduced the platform concept and invited developers to build applications. The next day after the launch, Facebook encountered severe, unexpected traffic. There was a massive rush of users to try several applications. Millions of people had installed applications in the first couple of days. Zuckerberg hoped to have at least 5000 applications in the first year. To his surprise, he found 25,000 applications within six months of launch on Facebook.
As the customers installed applications, played, and got rewards, the News Feed informed their friends. The applications could easily penetrate the market. Even a modest application with no marketing expenditure could reach millions of users within a day. Almost every software and internet company was rushing to grab a pie of the Facebook platform business. On his part, Zuckerberg allowed developers to make money with their applications but did not charge them anything for running the software on Facebook. It led to an exponential growth of applications. The games and other apps generated endless activities on the site. People of all sorts of ages began to spend time there.
Gradually, the applications strengthened Facebook’s market position. The competitors were falling off on the wayside.
The platform model was one of the critical reasons for Facebook’s success. The company has become the center of an ecosystem. It helped the brand not only to meet broad customer needs but also accelerated mass-market adoption by maximizing the quantity & quality of interactions.
As Facebook efficiently transformed its early product successes into platforms, competitors had difficulty catching up.
The Rising Action —In the beginning, as Facebook continued to add thousands of users, the costs of running the servers increased. It was becoming a challenge to manage. But Zuckerberg was against selling ads as he felt that it would affect user experience. As costs mounted, he relented to some extent and allowed advertisements that would not interfere with user experience. Companies like Mastercard and Microsoft signed long term deals with the company. Yet, those contracts were not sufficient to meet the primary expenditures of the company.
The Crisis — As the company grew, Facebook faced severe financial pressures. It was way expensive to keep the service free for billions of people. Zuckerberg had to find a way to generate revenue to sustain the business. He realized that advertisements only could bring revenues. However, he hoped to find a new model that would not affect or interfere with a user’s experience. The team came out with several options like sharing data, selling avatars/virtual goods, or enable transactions & take a small cut. However, Zuckerberg was not happy with those ideas. He wanted a self-sustaining advertisement solution that would generate long-term growth. He didn’t want to waste his resources on chasing short-term gains. The team kept brainstorming for a long time, but the solution evaded them.
The situation changed when Facebook hired Sheryl Sandberg.
The Denouement — Before joining Facebook, Sheryl Sandberg worked as vice president for global online sales and operations at Google. She helped in developing the company’s radical self-service online advertising programs Adwords and Adsense. She played a valuable role in transforming Google’s advertising business.
Sheryl worked along with Zuckerberg’s team and came out with a solution that would go on to transform Facebook’s business.
5.1 DEMAND GENERATION
When a user comes to search Google, he/she would have already decided what they wanted to buy. The search website would show advertisements based on the query entered in the box. Google’s role is predominantly to fulfill demand. As the number of keywords a customer uses to search is limited, businesses often have to bid on the same keywords, which drives up the advertising cost. Another critical challenge is that companies can only market their products or services only at the moment when a user is searching for the product/service on the website.
Facebook, on the other hand, could generate demand. It has, on its hands, data of consumer behavior of billions of people, who spend a disproportionate amount of time on the site. The brand could predict or generate a demand based on their interests. It could entice people to purchase by showing products/services related to what they crave. It could help people decide what they want.
Facebook Advertisements For Businesses — On Facebook, the businesses could reach millions of users at a lower cost. They could target users based on a variety of attributes — including age, gender, interests, careers, specific geographical locations, income levels, and other characteristics. The businesses could decide when and how long to show the ads. They could also develop campaigns that have different goals. Customers also spend several hours and do a wide variety of activities on Facebook, which creates opportunities to present people with ads multiple times. No expensive keywords and no shorter windows for advertising.
When businesses advertised on Facebook, they were surprised to see considerable gains. The ads were successful.
The News Feed Component — One of the reasons why ads became successful on the site was its News Feed. When a friend likes a piece of advertisement information, the algorithm will share it among the hundreds of his/her connections. A recommendation from a trusted friend is more influential than any other advertisement.
Facebook’s social connections, coupled with News Feed, became a deadly pair in growing the advertisement business.
Self-Service Advertising — Another best thing about placing ads on Facebook is its Self-Service advertising. It enabled any company, even a small one or an individual, to go online, customize, and advertise on Facebook. Users controlled everything. Sandberg and her team had made it as easy as possible for people to place ads. It led to the proliferation of online advertising business.
5.2 FACEBOOK PAGES
Zuckerberg launched a feature called Facebook Pages, where he allowed businesses to promote their products/services. It turned out to be a boon for companies.
Any commercial entity could create a page on Facebook for free and host applications if needed. After creating a page, the company could use advertising to reach a massive customer base. Zuckerberg wanted to get as many companies to have their Facebook pages. He believed that as businesses spend more time on Facebook and interact with fans, they might soon find a reason to advertise. Anybody can join the page as a fan.
Nowadays, several brands use their Facebook page as a medium to communicate with fans, collect their feedback, address their concerns, and promote new launches. When users interact with a company page, the News Feed will broadcast the activities to their friends’ News Feeds. The company gains a massive reach.
ENGAGEMENT ADS — For business pages, Facebook encourages Engagement Ads. The design objective of these ads is to get more people to see and engage with a company’s Facebook post or page. With Engagement as an objective, the brand can create ads that could boost posts, promote the page, get people to claim an offer, or raise attendance for an event. These ads have become a source to add new fans/customers and retain existing customers. Zuckerberg wanted these ads to be organic in nature and should flow with user-related content.
Once the Facebook page reaches a critical mass of fans, the companies no longer needed advertisements to promote their product.
Several consumer product/service companies promote more of their Facebook page than their webpage.
6.0 NETWORK EFFECTS
Within a few days after Facebook’s launch, Zuckerberg observed that a user’s experience improves whenever a friend joins his/her network. That was the beginning of Network Effects for the website. A product or service is said to have a network effect when its value grows each time a new user joins.
As more friends joined, they published more content and information. User experience began to grow. It offered higher value to the people. It further attracted more people to join the site. As the number of users increased, the perceived value of Facebook soared, leading to a network effect.
Psychology says, ‘An individual’s action to try a brand often depends on a perception of how many other individuals are using it’.
The network effect has created an exponential growth rate for Facebook.
Multiple Network Effects — Among the brands with Network Effects, Facebook has a special place. The company has built multiple types of Network Effects into its business model over the years.
6.1 NETWORK EFFECT — FRIENDS
We have already seen that a user’s experience improves when a friend joins his/her network. As more people join, the more valuable Facebook becomes for each person using it. Do you think a person having hundreds of friends on Facebook would be willing to leave the site and join a new social networking site? He would have to start from scratch. Nobody would be willing to waste all their previous effort.
6.2 NETWORK EFFECT — PERSONAL DETAILS
For years, most of the users have been regularly uploading their content on Facebook. It’s an advanced storage space for one’s memories. People love glancing through their old stories, as well as other memories he/she had shared with friends.
The Digital Archive — In the past, people tried to record things in a diary or on a laptop, but it wasn’t the most effective solution for millions of people. When we were young, most of us would not be conscious of storing or recording things, events, or happenings. Facebook has become an automatic recorder of events in life. When we look back at our Facebook timeline, we could understand how we have personally changed/evolved over a period. Scrolling through them, we could realize how we were close to some of our friends. It’s a pleasant nostalgia!. Sometimes nostalgia makes a person feel good about himself/herself and his/her relationships. It is a source of strength and enables him/her to move forward in life. It’s an energy booster.
Are you comfortable parting with your old personal diaries, albums, scrapbooks, and other childhood/teenage things? Most probably, the answer would be no. Facebook is the digital archive of our stories and their emotions.
Endowment Effect — Why don’t we want to part away from our digital archives? One of the psychology principles called the Endowment Effect has an explanation.
The Endowment Effect says that when people willingly complete a labor-intensive task, they would come to value the fruits of that labor. He/she gets attached to the output of his/her toil. A user might not appreciate Facebook, but he would highly value the content and data he/she has put in. That’s his/her product. Nobody would like to leave it.
6.3 NETWORK EFFECTS — DATA
User’s content also plays a critical role in Facebook’s network effects.
Data Collection — On Facebook, users willingly add content on their own without any prompt from the company. The social networking site need not put any effort into capturing content and data.
Enhanced User Experience — As millions of people spend several hours on Facebook, the content recommendation engine algorithm collects a lot of behavioral data points and real-time information from the way the user maneuvers the website and then analyzes it. Through collaborative filtering, the algorithm finds common interests and then utilizes the insights to offer personalized and relevant content to other users through their News Feed. It also helps to predict user behavior and preferences.
Product Improvement— The data also results in the continuous improvement of the Facebook website to meet the changing needs, desires, and attitudes of customers. The more the data, the better the user experience.
Endless Source Of Meaningful & Engaging Content — As more people liked and commented on their friends’ posts, the Facebook algorithm has got almost limitless options to choose the engaging content to feature on a person’s News Feed.
Facebook’s utility value keeps increasing as users keep adding more data.
6.4 NETWORK EFFECTS — PLATFORM
Facebook also leverages cross-side network effects through Platforms and Facebook Pages.
Facebook’s platform serves two groups of people — Third-party developers and users. Both of them attract each other. Applications’ quantity and quality improved with the rise in the number of participants. It further attracted new people to the website. Similarly, Facebook Pages enabled businesses and customers to attract each other, generating cross-side network effects.
With strong network effects, the value of the platform and Facebook Pages continue to rise sharply.
6.5 NETWORK EFFECTS — FACEBOOK CONNECT
Zuckerberg's team introduced Facebook Connect in 2008. It turned out to be a hit among the users.
Definition from WhatIs.com — Facebook Connect is a single sign-on application that allows users to interact on other websites through their Facebook account. By gaining access to the user’s friends list, the website is able to show the user which of their friends have also accessed the website through Facebook Connect.
Customer Benefits — Facebook Connect works because people were more comfortable to trust the Facebook brand than that of a smaller, lesser-known third-party website. Also, they would be happy not to remember one more username and password.
Business Gains — Facebook Connect encouraged millions of websites to install Facebook Connect code. Those third-party websites also gained massive benefits from this initiative — They could signup more people as customers had little fear. Those websites could understand user’s likes, dislikes, interests through the customer’s Facebook profile, and deliver personalized experiences. The information also helped them to customize the marketing language.
Facebook’s success is due to multiple factors. It’s a combination of several activities. Those activities complimented, reinforced, and enhanced each other forming a strong chain link. A competitor entering the market would find it difficult to build those activities and their relationship.
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References: The Facebook Effect by David Kirkpatrick, Hooked by Nir Eyal, Nudge by Richard Thaler, Predictably Irrational by Dan Ariely, Article — When Data Creates Competitive Advantage by Andrei Hagiu Julian Wright, Huffpost article On Aldus Pagemaker by John M Fox, HBR article— Products to Platforms: Making the Leap by Feng Zhu, Nathan Furr, Network Effects — Predict the Future of Facebook by James Currier on Nfx.com, Article — What Makes Data Valuable? by James Currier, HBR article — Why Some Platforms Thrive and Others Don’t by Feng Zhu & Marco Iansiti, Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne, Positioning: The Battle Of Mind by Al Ries and Jack Trout, What is Strategy-HBR Article by Michael E. Porter.