Insight

Facebook wants users to spend more

People posting pictures and sharing stories have powered Facebook's rise to the top of the online world, but that may not be enough to keep it there. This week the company announced changes to it payment processes, allowing members to spend more on the site.

The move is prompted in largely part by the increasing pressure now on Facebook to drive more dollars.  And while it's being presented as a chance for users to buy more goods and services without ever leaving the site, this 'opportunity' may very soon morph into an obligation.

Spending money on Facebook is not a new phenomenon, of course. But until now, the currency has been Facebook Credits, and it's used mostly to buy things like imaginary tractors and plows in social games like FarmVille.

While less than 2 per cen tof users actually bought anything, their transactions still drove a whopping 15 per cent of Facebook's US$4.27 billion in revenue last year.

Not only do those dollars disproportionally contribute to the bottom line, they're now growing at a considerably faster rate than the site's primary source of revenue, display advertising. While ad income grew 37 per cent in the first quarter of this year, payment revenues soared by 98 per cent .

For Facebook, the math is clear: People spending time on the site is great, but spending money is infinitely better; and not merely preferable but absolutely essential for the company's future prospects, particularly with the investment community looking for constant revenue growth. As such, the challenge ahead is getting users to spend more and in different ways.

The first part of the process is pretty straight forward. Facebook is going to let gaming companies, app developers and media outlets introduce subscription plans on the site. Everything, from apps to articles to movies, can now be monetized, either on a one-off basis or through subscription rates.  And while that doesn't necessarily mean there will be a charge for everything, it does make it infinitely easier for content producers to make users pay.

The second big change is the payment system. Gone as of next month will be Facebook Credits. In its place will be direct payment using real-world dollars. Users need only input their credit card information and be charged accordingly.

It's smart change for Facebook, though still somewhat of a humbling step back. For a time, Facebook Credits looked poised to become a universal currency, with users around the world swapping their money online for Facebook dollars. However, it soon became clear that enforcing a standardized global price for all items, regardless of exchange rates and local market conditions was hugely limiting, if not impossible in developing regions.

One element of Credits that did work for Facebook, and that is unlikely to change, is the 30 per cent cut it took on all sales. Indeed there will be tremendous pressure on the company to maintain that slice as it quickly scales up overall transactions. Right now there is not much to buy on the site but expect that to rapidly change as sales, not status updates, becomes the currency Facebook requires.