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

Abstract

We apply a stylized model to investigate the optimal revenue model for a monopolistic online platform that offers social networking services. There are three possible revenue models: an ad-sponsored model that offers a basic service, a SM that offers a premium service, and a hybrid model of both. We study a scenario in which the unit misfit cost of the premium service is lower than that of the basic service (the easy-to-use premium-service case), and a scenario in which the relationship is inverted (the hard-to-use premium-service case). We find that the ad-sponsored revenue model is always dominated by the hybrid model. When the ratio between the quality of the premium service and that of the basic service is too low (high), the hybrid (subscription-based) model is optimal, regardless of whether the unit misfit cost of a premium service is less or more than that of a basic service. Interestingly, we find that, in the easy-to-use premium-service case, as the unit misfit cost of the premium service increases, the hybrid model is more likely to become the optimal revenue model. However, in the hard-to-use premium-service case, when the unit misfit cost of the premium service is below (above) a threshold, as it increases, the subscription-based (hybrid) revenue model is more likely to become the optimal revenue model.