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I recently contributed a chapter to a book on social media, in which I wrote about the development of the social media industry and how I believe it will develop (available in all good bookstores at some point, apparently).

Once I'd finished writing this chapter, being the mildly obsessive type of guy I am, I continued to read into industry analysis and management theories, which eventually led to digging out my copy of Michael Porter's Competitive Advantage.

Then, during a particularly dull train journey, I decided to look at how you could apply Porter's Five Forces to the social media industry and agencies within the industry (I've been intentionally generic as I think the application fits with the industry as a whole, rather than any individual organisation).

I'd like to caveat the following post with a few things; 

1) I don't necessarily agree that there's such a thing as a 'social media industry' as it forms a part of a different service (for example, public relations and social media or advertising and social media) but as it stands today, businesses are still buying social media, so where there's a demand.

2) the thoughts below are beta. There, caveats done, now I can say anything I want ;-). Oh, and please excuse the graphs.

Wikipedia gives a pretty solid 101 on the methodology;

“Porter's Five Forces is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability.

An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven down to zero.”

Now that the social media industry is about ten years old, it's becoming more interesting to look at how it's going to develop as a mature industry, because it's beginning to stabilise and there's a healthy understanding of product/service across the board.

For those of you that have forgotten A-Level Business Studies, below is Porter's Five Forces diagram (albeit a little more colourful than the original).

Porter's Five Forces

New entrants

For new entrants, social media has feasibly low barriers to entry - there's usually low buyer loyalty (it's new enough for buyers to frequently review work still), agencies are financially low risk to set up (see Andrew Bruce Smith's blog post on launching an agency on a credit card) and new business models mean it's easy to challenge established businesses.

However, a lack of experienced talent, little economies of scale (in the majority of models) and a reduction in client budgets and risk-taking mean that it's a mixed bag for new entrants into the industry.


Substitutes is fairly self-explanatory. Is your business easily substitutable? Could someone else do it better, cheaper or faster? And if so, why? At this point, he also discusses the price / performance trade-off, something that becomes interesting when applied to the social media industry.

The original graph suggests that clients are willing to sacrifice performance for a lower price, or increase performance for a higher price. I think we can take this graph a little further as the social media industry is governed by a skills and experience issue - making the trade-off a little more complex.

Below I've added brackets to the graph to demonstrate the difference in agency type/skill/business position.

It's a simple addition to the diagram, and it's easy to plot agencies on here. You have the commoditised social media agency (churning out work such as Facebook page management), the mid-level agency providing engaging content and qualitative and quantitative research for a higher return (in both senses) and then the strategic consultancy providing top-down social business advice (and linking social to business objectives and savings/sales).

What I find most interesting about the price / performance trade off is the idea (currently under-researched idea) that the price increase isn't directly matched by the performance increase, so where Pr 1 = Pe 1, Pr 2 = Pe 1².

Basically doubling the budget (in my experience) is more likely to triple to output. My theory is that as an agency receives more investment from a client, that client in turn receives more emotional and psychological investment from the agency - creating an exponential growth curve for the price / performance trade-off.

Porter would argue that here we see that substitute businesses are a bigger threat because they promise a significant improvement in performance or price. This is where I think the social media industry is going to mature further.

We currently have a whole host of business operating in the two lowest price brackets, but as clients become increasingly understanding of the potential impact of social media, we'll see agencies spreading out over all three brackets.


The buyers (clients) are becoming better educated and more experienced with social media. Certain businesses are taking building skills in-house and upskilling staff, while other businesses are creating much tighter briefs and giving more consideration to what type of agency they feel will provide the most effective work.

Buyers also have a significant amount of control as the industry is currently pretty bloated and most agencies would rather compete on price than on performance (again, in my experience) - allowing buyers to barter. There is the added complication of buyers looking to amalgamate social media into existing budgets (volume discount, again, lead by price and not necessarily performance) as well as the perception that it's easy to switch social media agency (a conflict between short-term and long-term views of social media, for another post).

The opportunity for the industry will come when it matures and agencies spread across the three price/performance brackets previously mentioned. The industry will become healthier (with fewer agencies, but with a great market value) because the buyer will have a multitude of choice and the trade-off will focus on joint axis, rather than the singularity of price.


Speaking with two excellent old colleagues recently, I explained that there are about 1,000 people in the UK social media industry that actually do work and another 10,000 that talk about the work that the 1,000 do.

Supply is an issue and it faces the same bottleneck that agencies face - those that are experienced provide clients with confidence, so are given work, those without experience present a greater risk (in an industry that is already perceived as risky), so experience becomes exponential, while inexperience struggles (also creating a supply/demand vs price situation).

Throw into this predicament the melding pot of backgrounds (digital, public relations, advertising) and suppliers become difficult to assess. As the industry develops and stabilises, I think we'll see more time invested in developing staff (because we'll have more senior people who can do the job too), which will hopefully create a virtuous circle.

Existing competitors

There's a large pool of agencies in the social media industry (to the point where it's bloated) and severe price undercutting is endemic - but this seems to be characteristic of an industry still maturing. I believe that in the next twelve months we'll see a fall in the volume of agencies (see Hugo Hopenhayn's The Shakeout), but a rise in market value as agencies begin to compete on performance as well as price.

It's a great (but scary) time to be in the social media industry, so fasten your seatbelt.


Published 15 April, 2011 by Jed Hallam

Jed Hallam is Communities Director at VCCP and a contributor to Econsultancy.  

1 more post from this author

Comments (7)

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Drew Harding

Hi Jed, thanks for this post... It's a great read and i found myself nodding my head at nearly every paragraph! I totally agree that as the industry progresses, agencies will have to offer more strategic and ROI based services and clients will have the pleasure of choice.

Every week, we see social media being used in new and exciting ways and business are really benefitting from this but it's all down to good agencies planning, designing, building, testing, analysing and optimising social campaigns!

One of my favourite blog posts for a while... thanks for spending the time to write it - a very exciting time indeed.

over 5 years ago


Ged Carroll

Jed whilst I'd agree with your theory I would disagree with the assumption that 'creating an exponential growth curve for the price / performance trade-off'.

There are limiting factors that come into play at high commitment levels:
- Going native: when the agency buys into the client that much they lose objectivity which helps them steer programmes and tend to become a monoculture
- Freshness: over time people become intellectually jaded and ideas need freshing up that is a natural break point between client team and client. If the agency is big enough they can inject new blood into the team over time; but at that commitment level you run the risk of going native

over 5 years ago


Nick Stamoulis

The social media marketing industry faces a lot of problems that are similar to the SEO industry. The biggest one being that anyone can call themselves an "expert" and undercut the qualified consultant/agency. At some point, companies are going to realize that going with the cheapest option really isn't worth it.

over 5 years ago


Vinny DeFrancisco

I agree with Nick. I see many similarities with the SEO industry &....to date myself....the Dot Com era. Clients need to educate themselves on the Agency and the people that make up the agency. So many fly by night Gurus/Experts/ Ninjas are trying to make the quick buck. Showing the client objective metrics and ROI that sets the standard on why they need the service is the key to longevity and a "trusted advisor" mentality with your client.

over 5 years ago


Ehsan Khodarahmi

A very good post Jed, thanks for sharing your thoughts. Also very good comments and arguments. Very true that Social Media is not a new thing and what's happening now is exactly the case of SEO few years ago. There is no such thing as "guru" or "expert" in Social Media; but unfortunately clients go after image and higher prices as they assume that is the solution; wrong move!

I agree with your price/performance argument however the challenge is education in my humble opinion. Sadly many agencies are manipulating facts to win business and then do they care about the brand reputation?! Then whose responsibility is to manage reputation and build relationships? Thus agency selection is vital. Social Media is one form of communication which must by handled by experienced communications management who are prepared to open up and act genuinely transparent as opposed to ghost writing and or practising unethical theories such as emotional intelligence. I wrote something about Social Media practice called it 'Social Media based on HTC'


Also ran a Social Media workshop in which I tried exactly the same thing you did with Porter's five forces but with KISS in marketing


Lastly I would say, Social Media must not be seen and dealt with with traditional communications techniques, otherwise the loss is massive followed by hefty costs.

over 5 years ago

James Stewardson

James Stewardson, Search Strategist at PHD Media

Great post Jed, I like the business angle you’ve taken when analysing the industry. Not the usual fuddy duddy predictions. Many companies are looking to become more social (understatement of the year), and plenty of them are doing this with the main focus of increasing profits. I see this focus as the driving force behind companies wanting to measure their social ROI.

It’s easy then for agencies and “experts” to simply price services based on ROI, which ultimately creates a culture of undercutting competitors, but is this right? Does this help with the first goal of becoming more social?

I believe for the market to mature, a standard set of measurements must be set and widely understood, so all parties can be compared to fairly. This leads back to the multimillion pound question. What should those measurements be?

over 5 years ago


Michelle Carvill

Nice post - and like the application of the business theory. Interesting that you say that the strategic stance will grow and become more dominant - as someone who works with clients from an needs audit strategic planning perspective - all we've done in our agency is include social marketing as part of those platforms. Agree with the comment re not using traditional marketing methods with these new platforms as clearly they behave significantly differently in many ways - however, the fundamentals of understanding need and tailoring strategy to deliver remains. Speaking with businesses that are 'doing' social media (or so they think) there are so many that have done any 'thinking' and planning about objectives. The platforms are far too fundamental to be played with by newbie experts - that's what concerns me, that 'anyone' thinks they can 'do' social media...

over 5 years ago

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