The Cost of a Social Network

Over the last few months we have been asked by a number of companies to build them a social network of sorts. I wanted to break down some generalised truths so you can learn from them and get an idea of what it takes to build a social network and maybe take away a kind of instinct, an idea if you will which will help you to understand if your social network is going to work.

So, first I want to apologise, the maths in this article is used to help provide a direction, a way of thinking rather than to be used as a precise measure. Also there are some clear counter examples to much of this logic. But that does not mean you can just discount it. If you’re going to compete with the likes of Facebook (and yes, if you have a niche idea you are still competing with facebook as they likely have most of your users).

The focus of many fresh founders have when they look to start a social network is to approach a company like us and ask “How much will it cost?”. Sure we are happy to help you build something but we don’t build products that fail so our response is always the same:

  1. Who is going to use it?
  2. How are you going to get them to use it?

If you’re building an add funded social network and are unsure about either of the above questions, then it’s the sales and business consultancy arm of our company your looking for, not the tech guys! And here’s why…

32.33 billion was last year’s total social media ad spend (Desktop + Mobile) worldwide
2.46 billion people are on social media

Let’s divide these two numbers! and we get approximately $13. This is your value per user in your network if of course you were to own all of the users online social activity. The likelihood is that your users are not just going to quit Facebook, Instagram and Twitter when they download your app. So let’s say by some miracle you get 10% of their time. So you get 10% of their total social value, $1.30.

So, how many users do you need? Simple company running costs assuming your starting out may be close to $350,000 per year at a bare minimum assuming 7 key people and a few overheads.

So this means you need around 270,000 users just to keep the lights on!

Well… It’s a lot.

So, how much does that cost? Getting installs/sign ups is easy, getting customers that will use your app for a year and get you that $1.30 is hard. Remember there is a competition for users.

The average CPA for a non paid product like a social network is somewhere in the region  $8.21 -> $76.40 /user lets take an average just for fun..

 

So to get the 270k users this is going to cost you
22.85 million

Now you can see why a simple social app like instagram needed 57.5Million in investment to create a valuable business…! I will bet you a large amount of cheese that 50% of that was spent on marketing and user adoption.

The bottom line is this
You have to leverage, you have to draw on networks you have that are of value and find a way to bring this  number down fast… The best way to think of it like this. Your objective in a tech startup that is selling users is to sell the idea that you can get users cheaper than an investor could go out and buy them for, this way the investor is getting a deal when investing in your company. If you can use your leverage and prove that you can get users at a cost of say 10 million, that’s half price! An investor may give you some money and see if you can bring the cost down further. Ultimately they want to make 100 to 1000 times on their money so if you can get 270,000 users for only 200k to 2 million you may have the investor interested and you may be able to build your company and any product we build you will grow!

So you still want to start a social network? What problems do you need to address?

  1. Adoption, If you don’t have a clever strategy to get lots of users you’re dead
  2. Stickiness, if you don’t have a clear reason to keep people for at least 3-10 years, your marketing cost is just … down the drain.
  3. A way to advertise or make fiscal use of your network without driving away the users you paid so much for!
  4. The ability to be objective, this is going to be a hard nut to crack, you cannot have a mindset of build it and they will come..
  5. Limit your losses and proceed carefully.
  6. This is a difficult space to win and it’s very competitive so working with very smart people will help, people that can out play your opponents.
  7. You need creative people that can reimagine the current social system. Most people really struggle to imagine new ways of doing things they have done 100s of times before, they get ingrained. Remember most people are not creative AT ALL, and if you’re not creative you’re going to struggle assessing someone else’s creativity.