Social Media ROI - the Netflix example

I started posting about business metrics for social media companies, but it quickly became obvious that I needed to explore revenue models first.  Media companies are all looking at different ways to engage their users more, and the proliferation of social media tools and services is opening up doors that are starting to make sense.

Before even considering revenue streams, you have to understand the motivations of your users to participate.  Wikipedia’s fundamental premise of being not-for-profit creates a certain kind of relationship with its core user base, a relationship that would be destroyed with the introduction of revenue streams that were considered extraneous in any way.  Users would feel betrayed for building a service with their own blood, sweat and tears that someone else then benefited from financially.

Should the Wikipedia community decide that the fruits of their labor could be used to help other nonprofit entities, they might then consider ways to make money and donate it.  Even in deciding how to donate cash, however, the community could become divisive, disrupting the harmony that makes the system so rich. 

The participatory ecology is very delicate.

But there are ways to build incentives into social media that benefit everyone in obvious and tangible ways.  When you rate a movie in Netflix, for example, you are contributing to the data pool that powers the recommendation engine.  The basic nature of movie selection is rooted in recommendations from friends, family and public perception.  Hollywood marketing agencies will argue it’s all about branding, star power and licensing which certainly launch a film in those precious first few days.  But fickle audiences are harder to chase after a film goes to home rental.  At that point, recommendation is key.  Netflix understands this and how it impacts access to the Long Tail.  So, they bet heavily in their user interface on creating a circle from rating to recommendation to selection back to rating again.  If the circle helps the user, the user will build a deeper queue.  If it doesn’t, they likely lose the customer to the local rental shop.

Now, the incentive builds in a clever way.  If the queue reaches a breaking point, the user starts considering the upsell opportunity, increasing from a 3 movie limit to 8 movies and paying Netflix more for that service.  The system becomes more intelligent and helpful the more the user contributes data to it.  At a certain commitment level, the user then feels a need for a deeper relationship in which they are likely to invest.

Lastly, and this is the smartest part, Netflix makes it harder and harder for a customer to consider leaving the system for a competitor.  The more the user sees benefit from participation, the more they give.  The more they give, the less likely they are to leave.  Even if there was a way to take your data to another service, the system builds loyalty to the brand and the user experience that they’ve spent time and energy learning.

So then how do you define the social media revenue model?  It seems to me that the model looks like this:

1)         Build a system that encourages users to add data

2)         Provide an instant gratification service back to users based on the power of the data they provide individually and collectively

3)         Charge subscription fees:

·         advanced functionality

·         data storage

·         distribution

4)         Upsell additional services where available or possible

As users contribute more data, the service gets more valuable.  They become willing to pay for a deeper commitment and more ways to exploit the data pool that gets more powerful as it increases in size.

Lastly, there’s another revenue stream you can derive from partner relationships, third-parties who are able to leverage data uniquely.  We tried a variation of this at InfoWorld where we pulled data from Feedster and displayed search results that were relevant to the page.  Newsweek is doing a variation of this idea with Technorati.  The social media tool provider can find revenue through the media property as distributor.  The incomplete piece of this model is the data that could come directly from the distributor.

I’ll explore this element further for the traditional publisher models.  Understanding which direction to go with social media, however, requires an understanding of where you’re going to find the ROI.  The one above is the most obvious to me.  What other models are people exploring?

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