Facebook can charge $2.50 per member per month

I was approached by a friend who believes that Facebook will eventually charge for the service and he  wanted to know what that fee would be. My uninformed reply was that Facebook will never charge for the site as along as they are able to generate advertising revenues and per action fees from users. Plus, if they do, another free enterprising clone will be sprung that will cater to the users who decided to leave Facebook.

Nonetheless, I decided to entertain the idea and promptly opened a blank spreadsheet. A few key assumptions:

1) Starting point of 400mn users worldwide
2) Assume an attrition rate per price level
3) Assume all US dollars
4) Assume costs of 10% of revenue for credit card fees, staffing, and systems to support payments.
5) Assume Facebook currently generates $525 million annually in advertising and other fees
6) Assume they lose those fees commensurate with the attrition level of users.

See a previous write-up Cashburn Book for old assumptions on Facebook's revenues.

The calculations show that Facebook can maximize profits by charging a price of $2.50 per month. At that level they will lose 25% of their user base or 100 million users but they will generate $8 billion in revenues.

That revenue level would drive Facebook to instant cash flow positive and they will have zero issues going public.

Will FaceBook do this? I still don't think so. Are they running a more complicated version of this analysis and going over it weekly? You betcha.