Monetizing Social Media, 2.0 Style

During the late-nineties Internet bubble, investors saw the explosion in time spent on the Internet and forecasted that someone, somewhere, would come up with a way to monetize it all before those companies bled out their VC funding.

Turns out it’s much easier said than done.

Sadly, most of the companies that focused on user growth while hemorrhaging money didn’t make it too deep into the new millennium. Poorly targeted display advertising, the billboards of the Web, were about the best they could do, and it wasn’t enough to feed their ambitious plans for growth.

In the last several years, as profitability has again taken a back seat to user growth, we’re hearing grumblings of the “B” word again being used to describe tech valuations. And while I can’t say that I’m rushing to buy on Social IPOs like Linkedin and Facebook, what I can say is that the industry has learned a lot in the last 10 years about how to monetize user-generated content.

The key is taking advantage of the enthusiasm people have for commercial products, and the trust they place in their friends’ opinions. That’s something the original generation of Internet companies didn’t fully comprehend, and it’s enabling this generation of startups to break even much earlier in their lifecycle than the previous one.

One strategy is incorporating either an outright commerce platform (Etsy) or promoting affiliate-driven product links (Pinterest’s “Gifts” page). While this model was pioneered early on by Amazon and Ebay, the more recent success stories are driven less by their convenience than their social engagement and style. Displaying products that your friends think you will like is more effective than even the most precise demographic targeting.

Enabling companies to take this approach early in their lifestyle is Skimlinks. Every day, millions of users inadvertently create value for a retailer by recommending a product to their friends. While retailers often offer a cut of each sale to registered affiliates, many users don’t know or care and therefore nobody gets credit for the assist.

That’s leaving money on the table. Skimlinks’ software automatically converts URLs and product references into affiliate links, making sure the publication, blog, or social media platform gets the commission it deserves. Unlike display advertising, it doesn’t clutter your screen or make you feel like you’re being pitched, so it’s the perfect way to monetize eyeballs without hurting your product.

Alternatively, companies can take the slightly riskier approach of mixing product advertisements into their user-generated content. Because this strategy is slightly more intrusive, it’s mostly favored by established powerhouses, most recently Twitter and Facebook. While it’s difficult to make an apples-to-apples comparison, it stands to reason that it’s also much more effective than the standard display used by their predecessors a decade ago.

While the monetization puzzle is still far from solved (see Dave Lifson’s post on the $100m Tumblr is leaving on the table), these are putting a serious dent in the red ink at early stage social media companies everywhere. While the skeptics may be right in doubting market valuations, the social business model is here to stay, thanks in large part to innovative revenue models.