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I was nodding my head in agreement until I got to this line > where you make more than you spend on each user, and it gets better not worse as you get bigger,

I was nodding my head in agreement until I got to this line > where you make more than you spend on each user, and it gets better not worse as you get bigger, you may not look like some of hottest companies of today, but you’ll look a lot like Google and Facebook. Wouldn't Facebook be an example of a company with bad unit economics?

pbreit 11y ago
Considering Facebook is a website with zero marginal costs and zero acquisition costs, no. It makes way more $$ than it spends, especially marginally/per-unit.
- jegutman 11y ago
  Yea, and why not just look at the actual history of FB where they were quite easily able to pay for server costs at an early point with ads. It's possible they hit a point where they were losing money, but 100% at any point past the very beginning if they wanted they could've invested less and been a profitable business. Possibly not a business that would've existed for the long run and it might have opened the door for a competitor, but they could have drawn down money out of the business they had built. Many of the companies people complain about actually couldn't do that because they don't have any ability to raise their prices without losing all of their customers.
steego 11y ago
You're accounting for Facebook's and Google's business model all wrong. The end users aren't the customer. Advertisers are the customers. Think of Facebook and Google more like giant hydro-generation plants that have to continually work to divert the flow of attention of its users to its customers. Like any hydro-generation plant, you want to capture a monopoly from this recurring source of income so you can dictate premium prices from your customers.
- LAMike 11y ago
  A+ analogy
- nostrademons 11y ago
  They also have basically zero user-acquisition costs, on both the user and advertiser side. CAC (customer acquisition cost) is usually the largest variable cost for most businesses. Things like server costs, electricity, etc. are tiny in comparison. Cut CAC and your margins skyrocket. Indeed, the reason why Google & Facebook are profitable is because they're a very effective way of cutting CAC for other businesses. Their revenue is another businesses's marketing spending, and yet they're still better than the alternatives for driving customer conversions.
- eggie 11y ago
  To see these systems like massive hydro-generation plants, you first have to assume that human attention for advertising is an infinitely-renewable resource. Revenue is certainly increasing rapidly in recent years: http://www.iab.net/about_the_iab/recent_press_releases/press_release_archive/press_release/pr-061115 http://www.iab.net/about_the_iab/recent_press_releases/press.... Maybe there is no ceiling in sight.
eggie 11y ago
Unlike the others replying to you, I tend to agree. At least, I am dubious that they will "keep customers forever", which seems to be a key part of good unit economics. Things change, sometimes very fast.

pbreit 11y ago

Considering Facebook is a website with zero marginal costs and zero acquisition costs, no. It makes way more $$ than it spends, especially marginally/per-unit.

jegutman 11y ago
Yea, and why not just look at the actual history of FB where they were quite easily able to pay for server costs at an early point with ads. It's possible they hit a point where they were losing money, but 100% at any point past the very beginning if they wanted they could've invested less and been a profitable business. Possibly not a business that would've existed for the long run and it might have opened the door for a competitor, but they could have drawn down money out of the business they had built. Many of the companies people complain about actually couldn't do that because they don't have any ability to raise their prices without losing all of their customers.

steego 11y ago

You're accounting for Facebook's and Google's business model all wrong. The end users aren't the customer. Advertisers are the customers. Think of Facebook and Google more like giant hydro-generation plants that have to continually work to divert the flow of attention of its users to its customers. Like any hydro-generation plant, you want to capture a monopoly from this recurring source of income so you can dictate premium prices from your customers.

LAMike 11y ago
A+ analogy
nostrademons 11y ago
They also have basically zero user-acquisition costs, on both the user and advertiser side. CAC (customer acquisition cost) is usually the largest variable cost for most businesses. Things like server costs, electricity, etc. are tiny in comparison. Cut CAC and your margins skyrocket. Indeed, the reason why Google & Facebook are profitable is because they're a very effective way of cutting CAC for other businesses. Their revenue is another businesses's marketing spending, and yet they're still better than the alternatives for driving customer conversions.
eggie 11y ago
To see these systems like massive hydro-generation plants, you first have to assume that human attention for advertising is an infinitely-renewable resource. Revenue is certainly increasing rapidly in recent years: http://www.iab.net/about_the_iab/recent_press_releases/press_release_archive/press_release/pr-061115 http://www.iab.net/about_the_iab/recent_press_releases/press.... Maybe there is no ceiling in sight.

eggie 11y ago

Unlike the others replying to you, I tend to agree. At least, I am dubious that they will "keep customers forever", which seems to be a key part of good unit economics. Things change, sometimes very fast.