The Cost of Social Media

Kevin Rooke

If you’re anything like the average North American, your social media usage comes with a hidden financial cost of thousands of dollars each year. Yes, thousands. These hidden costs come as no surprise to anyone who took Economics 101, there’s truly no such thing as a free lunch.

But social media platforms have mastered the illusion of free, making it difficult to understand the hidden costs of “free” products. Don’t worry, this isn’t a “social media is bad, delete all your apps” post, I actually think social media is a massive net positive for the world.

The point of the article is to help readers understand how the “social media circle of life” actually works. It’s all about how money flows from advertisers to social media platforms, and back to advertisers in the form of revenue.

The largest social media platform in the world, Facebook, will be the focus of this article for two reasons:

Facebook has the longest history of reporting user value data (how much revenue Facebook generates per user)

Facebook has a sample size of billions of users (and millions of advertisers)

But this isn’t about picking on Facebook specifically. The findings and user costs below can be applied to Google, Snapchat, Twitter, and many of the other “free” social media apps on your phone. Even to offline media like cable television and highway billboards.

How Much Does Facebook Make From Each User?

In 2019, Facebook made $29.25 from the average monthly active user (MAU). That’s a global average, but Facebook also breaks down their average revenue per user (ARPU) into geographical segments. For the average North American MAU, Facebook made $139.35 in 2019. Most of my readers are from North America, so let's focus on that.

$139.35 is how much Facebook made from the average North American MAU in just 2019 alone. Personally, I’ve been an occasional (definitely more than one login/month) Facebook user for the last decade. And what this means, is that Facebook has earned an average of $520 from people like me over the last 10 years.

Here’s how Facebook’s North American ARPU has progressed over time:

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These numbers are impressive, but since this is money flowing from advertisers to Facebook, it’s not like users are paying anything...right?

Wrong.

In fact, the average Facebook MAU is likely paying 10-20x more than the numbers outlined above. Let me explain.

How Advertisers Make Money

Advertisers don’t buy ads just for fun, they buy them because they work.

And Facebook ads are no exception. Facebook does such a masterful job of pairing advertisements with relevant audiences that advertisers decided to buy a collective $70 billion of Facebook ad inventory in 2019.

That was an all-time high advertising spend, a milestone that Facebook has reached every year since advertising began on the platform.

In fact, over the last 10 years, advertisers have spent 44% more each year on Facebook ads. It’s perhaps the most powerful indication that Facebook ads work really well, and that Facebook users are returning multiples of that ad dollar spend back to those advertisers.

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If users weren’t returning money back to advertisers, the advertisers would stop paying Facebook. Again, advertisers don’t just spend money for fun. They spend money to make more of it.

Promotions Drives The Engine of Commerce



To understand how well ads work, let’s flip the cost of advertising upside down for a new perspective.



The average marketing spend of a company is roughly 5-10% of the revenue that company generates. This number varies wildly on an individual basis, as illustrated by companies like Tesla and Casper.



Last year, Casper spent 35% of their revenues on promotions, while Tesla spent 0.3%.



On a global scale, these outliers even out and promotions trend towards 5-10% of revenue.



These promotions can be money spent on advertising channels (social media, billboards, sponsorships), sales channels (door-to-door sales, cold-calling, and email blasts), and other marketing expenses (agency fees, marketing employee salaries).



Facebook is just one of many promotional channels available for companies to use, and all companies rely on a different mix of promotional channels.



But because 5-10% of company revenues are spent on promotions, that implies that in the long run, promotions yield 10-20x of their costs in revenue. Because what else could be responsible for creating revenue? All revenue traces back to a promotion of some kind.



Some companies spend their promotional dollars on ads, others on hiring cold-calling sales teams, hosting product unveiling events, or reaching out to press for coverage. Some companies even get a secondary ripple effect from their original promotion in the form of “word-of-mouth” referrals or social media “buzz”. But make no mistake. Every dollar earned by a company comes from the payoff of some type of promotional cost they made earlier.



Therefore, promotions are the engine of commerce. Some companies do a better job of turning their promotional costs into revenue, but they all promote. And in aggregate, those promotions work out to roughly 5-10% of revenues.



Therefore, since the aggregate promotions on Facebook in the past year totaled $70 billion (more if you consider the growing industry of social media influencers who earn money that Facebook never actually sees), it’s reasonable to estimate those promotions yielded somewhere between $700 billion and $1.4 trillion of revenue for Facebook advertisers.



And where did that revenue come from? The wallets of Facebook users.

Facebook Only Makes Money If You Spend It



Remember that $139.35 of revenue Facebook generated from each North American MAU in 2019? Multiply it by 10 - 20 (since marketing spend averages out to 5-10% of revenue), and that’s how much revenue the average Facebook MAU generates for advertisers. That’s between $1,393.50 and $2,787 spent by the average North American Facebook MAU because of Facebook ads in 2019. And almost all of that money is spent without you even realizing it.



Side note: If you deleted your Facebook account today, it wouldn’t mean you’d necessarily save thousands of dollars this year (though you’d probably save some fraction of that). More likely, as you spend less time consuming Facebook ads on your phone, you start spending more time noticing the subway ads on your commute to work, or the TV ads while watching live sports. As a result, those ads start influencing more of your purchase decisions, replacing those you were seeing on Facebook.



Advertising Doesn’t Work On Me, I Never Click



Readers who insist they “never click on ads” will find the numbers above especially absurd. However, the transfer of money from users back to promoters rarely happens when an ad is shown, and just because you don’t click on ads, doesn’t mean they’re not working.



In fact, it’s rare that people see an ad, click it, and instantly purchase a product. More often, the money promoters spend on ads plants a seed in the brain of a consumer, before spreading into a word-of mouth referral, a direct product purchase, or maybe just a website visit and an email newsletter signup.



After all, if promotions weren’t generating revenue for a company, they’d stop spending that money. But because promoters all over the world have continued to pump more money into Facebook ad inventory with every passing year, it’s clear that they are.



Even if you refuse to believe it.

