Optimal Revenue Model of a Social Networking Service: Ad-Sponsored, Subscription-Based, or Hybrid?

46 Pages Posted: 4 Dec 2020

See all articles by Zhiyong Li

Zhiyong Li

State Key Laboratory of Media Convergence and Communication; School of Economics and Management, Communication University of China

Donghan Wang

affiliation not provided to SSRN

Guofang Nan

Tianjin University - College of Management and Economics; Tianjin University

Minqiang Li

Tianjin University - College of Management and Economics

Date Written: October 22, 2020

Abstract

We use a stylized model to investigate the revenue model decision for a monopolistic online platform offering social networking services. There are three possible revenue models: an ad-sponsored model offering a basic service, a subscription-based model offering a premium service, and a hybrid model offering both. We study a scenario in which the misfit cost for the premium service is lower than the basic service (the easy-to-use-premium-service), and a scenario in which the relationship is inverted (the hard-to-use-premium-service). We find the ad-sponsored revenue model is always dominated by the other two revenue models. For the case of the easy-to-use-premium-service, the subscription-based revenue model is optimal when the quality of the premium service is too low, the free service quality is moderate and the strength of the unit misfit cost of the premium service is too low. In the case of the hard-to-use-premium-service, the hybrid model is optimal when the strength of the unit misfit cost of the premium service is too large and the quality of the premium service is too low.

Keywords: two-sided markets; subscription strategy; advertising strategy; social networking services; versioning strategy

Suggested Citation

Li, Zhiyong and Wang, Donghan and Nan, Guofang and Li, Minqiang, Optimal Revenue Model of a Social Networking Service: Ad-Sponsored, Subscription-Based, or Hybrid? (October 22, 2020). Available at SSRN: https://ssrn.com/abstract=3716673 or http://dx.doi.org/10.2139/ssrn.3716673

Zhiyong Li

State Key Laboratory of Media Convergence and Communication ( email )

No.1 Dingfuzhuang East Street Chaoyang District
Beijing, 100024
China

School of Economics and Management, Communication University of China ( email )

No.1 Dingfuzhuang East Street Chaoyang District
Beijing, 100024
China

Donghan Wang

affiliation not provided to SSRN

Guofang Nan (Contact Author)

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Tianjin University ( email )

92, Weijin Road
Nankai District
Tianjin, Tianjin 300072
China

Minqiang Li

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

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