Digital Podcast 45: How to Make Social Networking Profitable

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Peanuts for Cash

In this podcast, we interview Murtaza Hussain, CEO of Peanut Labs. Our focus is on making money in social networks by understanding the opportunity to turn a community into an economy.

Before we dive into the interview, it’s worth explaining why this is an issue.

Facebook and MySpace have grown very large as social networking sites and white label services like Ning have also grown very popular. These sites have lots of users and lots of page views, but how to make social networking sites profitable is still an open question.

There has been a lot of activity trying to make advertising work on these sites, but despite the ability to segment and target effectively, CPM (the price paid per 1,000 impressions) and click through rates remain low. My experience has been that Google Adwords have been 100 times more effective in terms of click through rate as compared to the same ads on Facebook. (Note: I would be interested to hear other people’s experience on this issue. If you’ve tried both leave a comment.)

So how can social networking sites make money? I posted a theory a little while ago that argued that organizations need to get beyond impression based economics and move to community based economics. And what are the economics of communities? They are micro-economies where trade, commerce and personal interaction are all intermingled with each other. I pointed to an example of Second Life where this is really happening.

While I was at the Graphing Social conference a few weeks ago, I hear Murtaza speak on a panel about monetizing applications. He mentioned that he thought virtual currencies were an effective way to monetize social networks.

I wanted to know more. Andrew and I caught up with Murtaza late last week and interviewed him for Digital Podcast 45.

Murtaza has a background in social networking. He co-founded XuQa.com, a leading online casual gaming community, which was built to 2M+ users and profitability. His experience with making money on XuQa led him to co-found Peanut Labs.

The core insight he got from XuQa was that they could turn the community into an economy by introducing a virtual currency into the community. In XuQa’s case, the currency is virtual Peanuts. The more Peanuts you have the more stature you have in the community. Peanuts can also be used to play games and buy virtual gifts. To monetize the currency, Murtaza turned to online survey’s. If users take a survey, they get paid in Peanuts. XuQa in turn gets paid in real money. The net result is an exchange rate that puts real value on XuQa’s Peanut currency.

Murtaza has taken the idea and founded Peanut Labs to act as market maker for matching market research needs with with Facebook applications and others who have created virtual currency that can be used to compensate users for taking surveys.

Here’s an example taken from a Peanut Labs PDF of how it works:

Peanut Labs Example

  1. A Gen Y Facebook user visits a favorite application, (fluff) Friends, which allows users to add, “care for” and “feed” a virtual pet as part of their Facebook profile. Facebook users trade “Munny” – Facebook’s virtual currency – for gifts and “pet food.”
  2. (fluff)Friends promotes Peanut Labs’ surveys as a fun network activity. Promotion respondents complete a pre-survey profile questionnaire as a prerequisite to taking surveys.
  3. (fluff)Friends survey participants who meet qualification criteria received highly targeted survey invitations, which additionally include qualifying questions that further enhance targeting. Upon completing the survey, they are paid with Facebook “Munny,” which can be “spent” on (fluff)Friends or other Facebook applications, for more social network fun.
  4. The research firm receives real-time respondent data, often within hours of survey launch.

This is how to turn a community into a virtual economy that can make real money. I wonder when Facebook and MySpace will figure it out.

If you have questions or thoughts about how you can turn your online presence into a virtual economy leave a comment.

Click here follow me on Twitter at http://twitter.com/alexnesbitt

[tags]Peanut Labs, Murtaza Hussain, social networking, community based economics, virtual currency, virtual economy[/tags]

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7 thoughts on “Digital Podcast 45: How to Make Social Networking Profitable

  1. But this will only work on consumer based social networks – and I would argue that it’s appeal is within a further subset, the young. And they also happen to be fickle. All attemps to create a virtual currency when e-commerce was taking off sunk without a trace. I am not convinced this will be any different.

    I remain unconvinced that there is EVER going to be a way of making real money on mainstream social networks and this ultimately affect their longevity. The sort of people who have spured their growth perceive they have an online chang out to play with friends – no one likes their personal spaces being invaded by salesman in the real world and so, I believe, will be the case online.

    A much greater potential to make money from social networking is riding a forthcoming wave of specialist social networks, appealing to specific interest groups, such as sports or business. People on these will be more receptive to buying because the sellers can be much more relevant with their offers.

    Creating a gimmick to try and engage the uniterested is NOT the way forward in my opinion.

    Ian Hendry
    http://www.wecando.biz

  2. it’s what I’m calling a “Vertical Social Marketplace” and I’m raising funding for one currently.

  3. Ian,

    I think you are missing the point. IMO, the key to making money is turning a community into an economy, where trade can take place and recognition can be given. In an economy, there are lots of ways to make money and build profitable businesses. And if you look at it from the perspective of turning communities into economies, it is not restricted to consumers, the young or anyone else for that matter.

    If we segment the use cases for social networks, I think we will find different mechanisms to create economies.

    Gaming: Virtual currencies obviously work great as a way of turning gaming environments into economies. Casinos in the real world use chips and make more money because they do. Second Life uses Linden Dollars to run it’s economy. XuQa uses Peanuts as it’s currency and is profitable. In this segment, the virtual currency reduces trading friction and creates a recognition system for users. Lots of money is being made by the bank in this segment.

    Commerce: eBay is the best example in my mind of a community that has been turned into an economy. eBay uses real currency. But it enabled an economy to build by enabling trading mechanisms such as auctions, user ratings and PayPal to reduce trading friction and ensure efficiency in the market.

    Specialist social networks: In this segment, I think there is a stronger argument for people being interested in buying things, but this type of social network is all over the web in the form of forums. There is every type of special interest forum imaginable on the web and the forum operators can make money advertising into these special interest groups. Just look at Internet Brands and you will see great example of this. Internet Brands is monetizing communities in automotive, home and travel segments. The thing that they are not doing is creating an economy where trade can take place, and I believe leaving money on the table. Perhaps the most interesting example to me of someone creating an economy in the specialist segment is Etsy.com which is focused on the handmade craft segment. In Etsy’s case, the creation of the economy is not about a virtual currency, but about combining a social community with a social marketplace.

    B2B: I think in the B2B use case it may be more about using the social network to increase the effectiveness of the real world trading economy. Just look at the Quickbooks or SAP communities. They are big and active, and more importantly they increase trading efficiency by helping people who need help find providers who can provide it.

    I could go on, but hopefully this clarifies the point that turning communities into economies can be a very effective way to create profitable businesses.

    Alex

  4. Hi I would like to know how to get paid through my Social Network that i’m in the process of creating, but it’s not finished yet. I also would like to know how to turn my online site into a virtual economy? Please let me know it would be greatly appreciated.
    Thank You,
    CFG

  5. Alex, many thanks for your considered reply. Gaming I will give you, as it is social and involves money by its very nature. The other examples you use are interesting.

    Commerce is rife on the web of course, but there isn’t a lot of cross over into areas of the web where there is a different primary objective perceived to the community members. Ebay people go there to buy or sell. But places like Facebook, a comparable large community but where buying/selling isn’t the first reason to be there, has struggled to add this element to the mix. Beacon got slated in spite of it doing much the same thing as the buying history feature on Ebay that most people are happy to share.

    There is greater potential in more specialist social networks I agree (that was my point), but it is very interesting you should mention forums, as in my experience forum members HATE being sold to and if anyone joins a thread in a way perceived to be “too salesy” then they get slated. Referrals can work in that sort of environment, but then unless the site owner can provide a link directly to the company being endorsed it’s hard to monetize. An ad linked to a competitor won’t benefit from an endorsement of someone else.

    I am not writing off socnets as doomed to failure because they can’t generate business, but I think we need to consider what sort of business they can generate. Our model at WeCanDo.BIZ will be charging the network members a fee (they are small businesses) to manage their endorsements and better channel the referrals. They won’t clear cash on the site itself (we will from them however), but they’ll see value in the number of calls or messages they get that lead to (B2B) business down the line and this will, we hope, keep them as paying members.

    I think money can be made, but not everywhere.

    Ian Hendry
    WeCanDo.BIZ
    http://www.wecando.biz

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