Companies like Google, Facebook, MySpace, YouTube and a host of others have all taken this concept, ran with it and are making big bucks for their websites.
Why are they in such high demand today in the marketplace?
Let's start by looking at the evolution of Internet adoption.
E-commerce really got started in 1994. Until that time period not too much business was being facilitated on the internet. People started to adjust to the internet at the rate of a million users a month by 1996 and the world was accepting this trend as the catalyst for the information age.
It was only a matter of time before the internet would produce something revolutionary that would change the way people connected and did business with each other. That thing was social networking, online.
Whether you're part of the millennial generation or a baby boomer or even close to retirement, every age bracket is being hit by the social networking buzz.
These websites have revolutionized the way companies facilitate advertising and also serve as a marketing strategy for various types of businesses.
But a big question to the untrained entrepreneurial eye is whether or not these websites are worth as much as they are being purchases for. Microsoft recently purchased a tiny 1.6% of Mark Zuckerburg's Facebook company for a burly $240 million. YouTube on the other hand was bought by Google for $1.65 Billion, and more mergers and acquisitions are expected to happen in the near future regarding these companies.
So just exactly what do these websites do from a business standpoint and why are they so effective? Here a few of the key points that give these websites their competitive advantage in the market.
1. Products aren't the focus
Today in the world of the Internet you are compensated for being able to do either one of these two things: you either own a community or audience that companies are trying to access, or you purposefully direct internet traffic to a company that has something to sell.
These companies understood that products are always going to evolve and change. If you were in the cassette tape business a few decades ago, you are bankrupt now as CDs initially took over that market, then mp3s sealed the deal.
Today it's I-pod's, tomorrow it will be J-pods. No one really knows.
But the one thing that is always constant in the economy is people. People are the easiest product to market because they're all over the place. If you can learn how to control an audience and keep them generating revenue streams for you online, you'll be taking advantage of the biggest trend in the information age today.
One of the first social networkers was a young IT student from India named Sabeer Bhatia. In the early 1990s he started this free e-mail service because e-mail was expensive and he wanted to stay connected with his friends.
He set it up in a way that if you wanted the service you first had to send an e-mail to at least ten of your friends telling them about the service as well. The result was that in two years he had an extended network of close to 1.5 million people.
Bill Gates, CEO of Microsoft Corporation, took a look at the community this kid had put together without any form of conventional advertising and couldn't believe how big his network was. He paid the student $416 million and attached his famous slogan Microsoft Social Network (MSN) to the community.
Even Bill Gates understood then that a network is awesome, but a network that can self-perpetuate and multiply itself without the help of conventional advertising is priceless.
3. Conventional advertising techniques don't work online
According to consumer reports, 57.7% of all products purchases on the internet are through personal referrals.
Pop-ups and banner ads are the next two closest and are not even one quarter as big as personal referrals. Think about how you heard about YouTube and MySpace; probably wasn't through an expensive advertisement on TV.
Chances are it was one of your friends or co-workers. Enough said.
4. People are always referring
This trend is quite frankly not new but has just recently been organized and directed to do business with. People are always referring things to their friends and co-workers that they like.
A good restaurant most of the time attracts its initial customers first by a small amount of advertising and then the rest of its more permanent customer base comes through the referrals of happy customers.
The movie industry uses this all the time, as most movies put out previews two or more months leading up to the movie and then after the movie is launched the previews stop and are not needed to sustain the steady flow of audiences.
The reason this works is because it is instant credibility when someone you personally know owns, uses or in the case of movies has seen something you are considering. Most people do not use the toothpaste they use because of an advertisement they saw on TV. They use it because their mom told them to use it or their friend's use it or someone told them it's the best one on the market.
The bottom line: personal referrals carry more weight than any form of advertising out there.
Key Takeaways for Entrepreneurs
So that's the scoop on social networks. Today no one cares what product you can come up with. They want the focus to be on the consumers and just how much of a community can be built around this product.
YouTube went from being worth zero to $1.65 billion dollars in 2 years. That doesn't happen with a product.
Products aren't that lucrative. People are. If you're a budding entrepreneur and wondering where else should focus on launching your business, you might want to consider how these social networking trends could be of benefit to you. My guess is, they already are. Just take a look and see for yourself. Affiliate Marketing companies like Amazon and Ebay all use this concept of providing a portal where people can network their products and services and engage in E-commerce.
Remember, however, that this trend is not here to stay as nothing ever is. So take advantage of this now.