A Recommendation Economy
Currently, social network sites make their money through online ad models like CPC, CPM and CPA. The problem is that traditional ads are fairly useless in social networking. eCPMs on social networks average around $0.60 and tend to drop on the larger networks to around $0.25 or lower. Advertisers end up buying huge volumes of impressions with hardly any return at all which is, obviously, a major problem.
One of the main reasons for these low-value impressions is that people use social networks to, well, socialize. They don't want commercial messages that are not somehow part of their ongoing conversations with their friends to intrude on their experience.
But there is a silver lining to users shunning commercial intrusions which is that users are very likely to discuss products on their own and are very receptive to product recommendations from friends and other trusted sources. According to a 2007 McKinsey study, fully 27% of all personal conversations in the U.S. involve some serious discussion of products or services. An eMarketer report on social shopping by Jeffrey Grau recently reported that the most credible source of product information came from "people like me" with a full 60% of users saying this is the best way to learn about an item.
So the question becomes how can social networks facilitate these conversations/recommendations in a way that benefits users, the networks, and marketers? In other words, how can we all build a real recommendation economy to help everyone in the value chain?
Turning attention into economic value will come through utility applications - or third party syndication -that users can easily navigate. What it comes down to is that social networks need to capture and structure the economic value users create when socializing with each other. And they need to realize that value in a way that benefits users and protects privacy.
Spread the Gospel
So how does this occur? First, users of social networks need to find value in the experience. Value can be something as innocuous as entertainment (Scrabulous or Send Good Karma are examples) or something not-so-innocuous as discounts on planned purchases. A user who finds instantaneous value will be more likely to tell a friend, and that's the only way a social network can succeed. Success depends on spreading the gospel so your buddies can share in your experience.
Once users trumpet the so-called "user experience value" to their friends, the community at large will have a similar valuable experience. The endgame is to take advantage of recommendations and translate them into cash. That's the recommendation economy and the only clear path to monetizing the social network. The principle starts with word-of-mouth marketing and gets supported by the product graph -the filter on top of the social graph connecting people to people, people to products, and (of course) products to products.
Word-of-mouth marketing is a lot more valuable than any advertising. Would you buy a pair of shoes because of a TV ad or due to the nonstop recommendation from a friend who raves about how comfortable they are? Odds are you trust a friend (or a friend of a friend) before believing any single corporate entity. In fact, you'll also most likely trust someone who has the same likes as you - even if they are not your friend. The Internet is a great marketplace to find products, and just like flea-markets, there are certain types of people who are better at drawing attention to themselves than the rest of us. These people are essential to the recommendation economy.
The Internet has created a new genre of celebrity-the Weblebrity. These Weblebrities love to make themselves known and more importantly become precious to other social community members because they are constantly in-the-know. They influence how utility applications spread throughout the social sphere.
Weblebrities are boons to social networks because these evangelists are motivated to maintain their influence and ostensibly their status. This is important. Since social networks provide value to the Weblebrity, he or she will do everything in their power to retain influencer notoriety and to continue to preach about particular brands or products. In other words, Weblebrities are exceptionally significant to the recommendation economy.
In fact, third party syndicates that have created specific Weblebrities are finding a long-term strategy that is directly related to the power-user experience. These individuals translate recommendations to sales because people get to "know" these famous Web-users as legit trendsetters through their influence measures and recommendations. As a result, these Weblebrities become a new source of product discovery and purchase validation for shoppers looking for some cool, new products, as well as drive a lot of new purchases.
Rev Your Engine
Social networks are stuck in the same predicament as the rest of the online world when it comes to turning traffic into sales because they have yet to take full advantage of the recommendation economy to drive sales. The Internet's economic structure (or lack thereof) is the wild wild west! One solution to this free for all is embedding every social network with the capability to have third parties corral traffic to sites that offer relevant products. Social networks are finding that functional applications for users are among the best ways to not only drive traffic, but earn real money.
Social networks excel at facilitating user-generated content (UGC) and have primarily relied on display/CPM advertising to make money. As noted above, the effective CPMs are quite low for most networks and this has raised a lot of questions on Wall Street and among VC's about the true value of UGC. UGC is going to be super-valuable as an increasing part of the Web, provided that the content is structured in a way that facilitates the recommendation economy.
One of the easiest and most effective ways to facilitate a recommendation economy is to open up your platform and invite best-of-breed utility partners in. With the advent of OpenSocial, these third party utility applications slide into any social network and create the revenue desperately needed.
If you look at the RPMs (combined revenue per thousand pages) of successful utility-app-driven pages, you can see a 2x-75x increase in the RPMs over what the network would be able to realize on their own. That huge increase is because of the community at large; they recommend something to their friends and then those friends follow the links to products - and buy them! Third party utility apps could be things like cross-container IM networks, profile managers, or social shopping networks.
Consider Meebo. This OpenSocial tool aggregates multiple instant message providers so users just go to Meebo instead of downloading each instant message service. The future of monetizing social networks is in this "hub" template, where the user finds what they need, using one application spread throughout many distinct social sites. And through these applications, recommendations become the driving force in creating viable fiscal solutions for social networks.
The social networking world is in the early phases of learning how to become financially solvent. Over time they will continue to mature (and surprise us, certainly) and learn that the best way to monetize is based on the user, not the site. Social networks can take advantage of inherent brand building offered and parlay recommendations into sales. Such evolving insight will drive traffic from social networks to brand/product sites and convert the networker into a bona fide, happy paying consumer.