Valuation of a Social Network

Introduction

Everyday millions of people are interacting ,creating and sharing content on social networks such as facebook ,twitter,instagram etc. These social networks are collectively called social media. Such large number of people on social networking websites make business and marketers perceive that these networks are high value to them. They can use these networks to effectively interact with their customers .Social media has helped businesses to treat consumers as assets as  they use the feedbacks and opinions of consumers to develop their next business strategy.

To use a social network  for their marketing campaigns business must be able to evaluate it’s value. A manager always wants to quantify the perceived value. He must have some method or data to understand the importance of facebook or twitter for his marketing strategies.

Laws such as Metcalfe’s and Zipf’s  can help to estimate the value of a social network.

Metcalfe’s Law:

Metcalfe’s  law is an optimistic but widely used method to assess a social network. It is quite intuitive. It states that value of a communication network is proportional to the square of the number of connected users of the system.

The law is nothing but an extension of simple problem of combinatorics in mathematics. Suppose there are n nodes in a network. The number of combination of  two people that one can form is n(n-1)/2.Therefore the value of network is proportional to n^2.Interesting thing to note is that cost of adding a node increases linearly .In fact just a day before IPO of facebook AOL Daily finance valued it using one of the variants of Metcalfe’s   Law.

Limitations of Metcalfe’s   Law:

As already said Metcalfe’s   law is an optimistic approach so it has got it's obvious limitations. Inception of  Metcalfe’s   law was based on the number of Ethernets in a network. Ethernets are homogeneous entities but people in a social network are not. There are cultural and linguistic barriers among people which decreases the effectiveness of a network.

There are so many things on facebook or social networking sites but things that interest people are things that come from their core network. Robert Dunbar a British anthropologist researched and found that a person can maintain a stable social relationship with only 150 people. Thus adding a person beyond core network does not increase the overall effectiveness of network similar to marginal law of productivity in network.Thus valuation of social network based on the number of people in it does not give  a clear picture of effectiveness.

Zipf's law is more conservative approach and it states that valuation of social network is proportional to nlogn. But it is also marred by similar limitations.

DAU vs MAU:

DAU stands for daily average users and monthly average users. A network having high daily average users are very effective. Content sharing and creation is very high on these networks, hence they have high capability to make a story viral. Facebook has been able to maintain this ratio above 50% for quite some time now while other networks are struggling to keep it even 5 percent. Therefore a product launch or brand building exercise on Facebook  can be more effective than any other network.

Conclusion:

To estimate the value of a social one must not look on sheer number of people in that network but look at the interaction level of consumers on that network. A network which has higher level of content. sharing and creation can make a story viral easily.The feedbacks from consumers are fast and abundant.These responses can be used to build effective marketing strategies.

 Before spending any time or labour on any social network one must estimate its effectiveness in accordance with his marketing strategy.