Facebook Could Actually Be A Direct Threat To Google's Core Business

james borow grapheffectJames Borow, GraphEffect

Photo: GraphEffect

One of Facebook’s innovative ad formats, Sponsored Stories, can be an ROI-profitable means of doing direct-response advertising, James Borow, CEO and co-founder of GraphEffect, tells us.This is potentially hugely important for Facebook and its war with Google, as it means that Facebook could start competing directly with Google for direct response, bottom of the funnel advertising budgets, and not just media/brand advertising budgets. 

But wait, isn’t Facebook atrocious at driving clicks and conversions? That’s certainly the conventional wisdom in the ad industry, and what we’ve heard many times. 

However, Borow tells us, that’s because those clicks are not tracked properly. 

Here’s how it works, according to Borow: 

  • Sponsored Stories are native actions taken by Facebook users (liking a brand page, checking into a page, and so on) that a brand turns into an ad and shows to that user’s friends. (For more on Facebook ad formats, read our explainer.)
  • That ad itself will usually have poor click metrics. But, crucially, that ad can lead to other actions. “A sponsored story may influence someone to share a post and then that share leads to the sale. We can now attribute that to the original ad.” Because that second-order effect isn’t usually tracked, Facebook ads seem to have a much lower ROI than they do. It should be noted that GraphEffect sells a tool that solves that problem, so obviously they’re talking their book, here. But Borow assures us that the numbers are very encouraging, often beating the ROI of Google search ads. And it makes sense to us. 

“I often refer to it as the death of the click,” Borow told us. “What now is relevant is the connection, or the share, and that is why Facebook is going to be a force for [direct response] advertisers in the coming years.”

If this effect works and can be measured well for advertisers, this could completely change the picture for Facebook. 

Google’s bottom of the funnel business is the most amazing online business model because it delivers measurable, reliable ROI for direct response advertisers, which allowed Google to grow revenue much faster than Facebook, as you can see in the chart below:

facebook google yahoo revenue

Photo: Business Insider

It’s always assumed that Facebook advertising is mostly top of the funnel, brand/media advertising, and that this is the huge pot of money that Facebook is going after. Facebook COO Sheryl Sandberg told us as much during Business Insider’s IGNITION conference

But bottom of the funnel advertising, which Google dominates, is a market that’s just as big and can be much more profitable.

If it turns out that Facebook’s ad formats can also work well for direct-response advertising in a scalable way, it would put Facebook in much more direct competition with Google—and instantly double its addressable market.

Previously: This is what advertisers hate about Facebook →

More: Facebook advertising: what it is, how it works →

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