The Facebook Advertising Ecosystem Explained

Facebook Ad Revenue

Over time, advertising on Facebook has become more sophisticated and data-intensive. 

Facebook has rolled out a spate of new ad formats in the past year and now offers at least seven ways to advertise:

  • Brand pages are free and are at the heart of Facebook’s advertising ecosystem.
  • Display ads are like the generic display ads you see across the Internet, albeit with Facebook’s superior targeting capabilities. Facebook calls them “Marketplace Ads.”
  • Sponsored stories take actions by users related to brands and brand pages and allow advertisers to turn these into ads.
  • Promoted posts originate as content on pages and are promoted in users’ News Feed to fans and potentially to friends of fans. Promoted posts are meant to boost engagement around advertisers’ content.  
  • Page post ads also originate on pages, and can include links, photos, or offers. These can be promoted to anyone on Facebook, even if neither you or any of your friends likes the advertiser’s page. They are priced differently from promoted posts. 
  • Mobile app install ads drive people to download apps directly from the News Feed. These can be targeted to specific mobile operating systems or to users on a data-friendly Wi-Fi connection. 
  • Log-out screen ads appear on a user’s screen after they log-out from a Facebook session. These campaigns cost about $100,000, according to Digiday. Facebook also offers search bar ads. 
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The advertiser’s page is central to Facebook’s social advertising initiatives. 

It is where brands boost engagement and originate content that may eventually become advertising. Brands often advertise their pages as a destination itself.   

Users “like” a brand’s page, thereby opting into that brand’s content and bringing them into their ecosystem.

The pages are free to operate, but often prompt brands to spend more in order to guarantee an audience for their content and acquire fans.

For example, most consumers would not likely wake up in the morning with the idea of liking the Facebook page of potato chip brand Lay’s

So, Lay’s spends money to place ads, and when users click them, it means they’ve liked the brand page and will receive the brand’s messages going forward. (See screenshot, right).

Why do brands want fans?

Brands can advertise directly to fans, and friends of fans, in their news feeds. In other words, it’s a known audience in a world of scattering consumer attention and, presumably, a receptive one (since they have voluntarily opted in to the content). 

Facebook hopes to reel brands in with this free product, get them hooked, and then push its ad products to amplify engagement.

Facebook hasn’t released its plan for Instagram yet, but it will almost certainly revolve around some sort of in-stream ads.

We’ll review each of Facebook’s principal ad products in turn in the section below. But before moving on, there are a handful of additional products and concepts that are key to understanding Facebook’s advertising ecosystem. 

  • Custom Audiences: Marketers can use the offline customer data they already have to find past or existing customers on Facebook. Then they can target these consumers on Facebook with ads. An extension to Custom Audiences, Lookalike Audiences, uses the same data to help companies find prospective customers on Facebook. 
  • Partner Categories: This is another tool that helps marketers leverage offline data. Let’s say you are a mum-and-pop shop and don’t have your own data to use Custom Audiences and make a highly targeted ad buy. Facebook offers the third-party data of a few vendors that to help you find your target audience on Facebook. 
  • CPA: This acronym means Cost-Per-Action, which is a new pricing method Facebook introduced last month. Instead of paying in the standard ways for per-click, or an impression basis, advertisers can pay for a certain number of Likes, Link Clicks (these are clicks on a specific link, not the whole ad), or Offer Claims. Along with Custom Audiences and Partner Categories, CPA is meant to help attract performance-oriented marketers to Facebook — as opposed to brand marketers, who often simply go for reach. 
  • FBX: Facebook is moving steadily into the world of data-enriched real-time digital ad sales. Facebook Exchange or FBX is an ad exchange that allows advertisers to serve ads to users on Facebook based on past actions they have taken online, like shop for an airline ticket. (See diagram, below.)  
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Display Ads
Display ads are Facebook’s original, and least effective, ad format. Facebook calls them Marketplace Ads, but that name is window-dressing: they are similar to other display ads across on the Internet.  

There is nothing particularly “social” about them, excepting, perhaps, Facebook’s superior targeting given its plethora of user data.

The problem with display ads generally — not just the Facebook variety — is a glut of supply on the market keeping prices down (there are few barriers to entry placing ads against content on the Internet). Furthermore, they’ve never been proven to be particularly effective, so advertisers aren’t exactly rushing forward to dump money into them. Finally, they aren’t transferable to mobile.

Facebook’s display ads typically hug the right-rail of the site, away from the main action in the News Feed. Increasingly they feel like an after thought compared to the new “native” ad formats that run in the stream.


Sponsored Stories
Sponsored stories were Facebook’s first foray into social advertising.  


Sponsored stories take organic actions from your friends and turn them into ads. For example, “Todd likes Taco Bell’s fan page, would you like to like to as well?” Or, “Mary voted in the Doritos poll, would you like to as well?”

The goal of sponsored stories is to get other users to replicate a friend’s action. Ideally, from the brand’s perspective, this social dynamic draws users to engage with the brand and eventually become of a fan of their page. If they like the page, it draws them further into a brand’s ecosystem with further opportunities for engagement.     

Page Post Ads and Promoted Posts

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Page post ads and promoted posts allow brands to advertise posts or content that originated on their page across Facebook in the coveted News Feed. 

There are several differences between page post ads and promoted posts:

  • Promoted posts can only be targeted to fans or friends of fans. Page post ads can be targeted to anyone and according to audience segments. (See example, above right.)
  • For promoted posts, Facebook charges brands a flat rate determined by factors including how many followers they have and the market they’re buying in. For page post ads, Facebook charges by impressions or clicks.
  • Promoted posts are much less flexible than the other ad formats. There’s no fine-grained targeting. You’re basically spending money to guarantee eyeballs, period. But page post ads can be targeted according to interests, gender, etc. 

Remember, what users see in their News Feed is determined by an algorithm that Facebook controls, so paid advertising on Facebook simply tilts the scales in your favour to guarantee a certain number of eyeballs for a post. An advertiser’s fans may have seen a Promoted Post anyway — spending money merely increases the likelihood that they’ll see the content. 

New York Times columnist Nick Bilton thinks Facebook is intentionally changing the News Feed to deemphasize content from large pages, essentially inducing them to pay lest they risk losing their audience. Facebook denies making any such move. 

Why do brands like promoted posts and page post ads?

As we discussed earlier, it’s eyeballs, and a potentially receptive audience, on the most popular website in the world’s prime real estate. Look at the ad above: it’s been shared nearly 5,000 times. An advertisement is being voluntarily shared out to people’s networks, each hundreds of friends strong. It is, in other words, viral advertising.

App Install Ads
Facebook has made a big push on app install ads since introducing them late last year. 

On Facebook’s May 1 earnings call, the company reported that 3,800 app developers had used the ads to date, and that they had driven 25 million downloads.

At first glance, it might seem like these ads are only useful to app developers who want to see a bump in their download numbers — not retailers or advertisers.

But in fact app install ads have been used aggressively by direct response marketers. Amit Shah, a vice president at 1-800-Flowers, says his company achieved 10,000 to 15,000 downloads a day for its 1-800-Flowers app using the ad units over Valentine’s Day this year. 

The cost per download turned out to be less than 5$ for some of their Facebook app campaigns, according to Shah.

“From a pure cost perspective and a reach perspective it was phenomenal,” he said, speaking on a May 6 conference call organised by Macquarie Securities


  • Social advertising still pretty much means Facebook. The king of social networks accounted for over $1 billion in ad revenues last quarter, while it’s estimated Twitter only pulls in some $150 million a quarter in ad revenue.  
  • Facebook’s ad strategy has sharpened over the past year and is now focused on monetizing its most valuable real estate, the News Feed.
  • Facebook’s advertiser tools are increasingly allowing marketers to layer in data to power their ad buys and targeting. 
  • Initiatives like mobile app install ads, cost-per-action metrics, and FBX help lure performance-based marketers to increase their overall budgets. 

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