Photo: Facebook S-1
Advertising is how Facebook generates the vast majority of its revenues.So, how does Facebook advertising work, exactly?
Facebook offers four ways for brands to advertise, which we’ll look at in turn:
- Brand pages, which are free and are how companies establish a presence and interact with users on Facebook;
- Display ads, which work like generic display ads you see all over the internet, albeit with Facebook’s unique targeting capabilities;
- Sponsored Stories, which take actions by users related to brands and allow brands to turn these into ads;
- And new “Premium On Facebook” ads which Facebook has recently introduced, and which we think will be huge drivers of revenue growth in the future.
Brand pages are the central tool for building and managing an audience on Facebook. Brand pages are also key to understanding Facebook’s new advertising initiatives. Users can “like” a company on Facebook, thereby opting in to receive its content. Companies use brand pages to directly interact with fans, offer promotions or sweepstakes, and even provide Facebook-specific marketing content.
Brand pages are free to create and maintain. However, there are often hidden costs. Many companies pay for ads to get “fans” or, alternatively, will run a promotional campaign to drive more traffic to their page (see example of fan-acquisition ad to the right). According to a report by web analytics firm Webtrends, fan-acquisition ads cost $1.07 per new fan, and this number is expected to keep rising.
Why do companies want fans?
Companies can directly advertise to fans through the news feed, and can also buy ads that specifically target their fans. Furthermore, if a user has voluntarily joined your brand’s page, they are more likely to be receptive to your message.
As part of Facebook’s new advertising initiatives, companies can now reconfigure their brand pages to the new timeline format. The timeline lets brands tell the history of their company back to the founding and also includes more social features to facilitate interaction with fans. See the screenshots of Ben & Jerry’s timeline below.
Like a good drug dealer, Facebook hooks advertisers with a free product: With “free” brand pages, companies can get a following on Facebook that they can then pay to increase and/or market to more effectively. This is where the other ad formats come in.
Facebook generates the vast majority of its advertising revenues from display ads. Facebook’s display ads look different from the banners you see all over the web, but they work along the same principle: They’re bought at auction and priced either by number of impressions or views (CPM) or by clicks (CPC).
Facebook is dominant in the U.S. display ad market. Last year it upped its market share of total display-ad impressions to 28 per cent from 21 per cent a year prior. By comparison, second-place Yahoo only accounted for 11 per cent of impressions.
In other words, most of Facebook’s ads are not some radically new “social advertising” you hear so much about (see chart below for a breakdown of social and display advertising). Display ads are just about the oldest form of online advertising. They widely considered necessary, but flawed. They can garner a lot of eyeballs, but their effectiveness is hotly contested because the metrics used to measure their impact are problematic (that’s a story for another day, though).
But one clear advantage Facebook has over other online advertisers is precise demographic targeting.
Using Facebook, advertisers can target their ads by:
- Relationship status
- Like and interests
While some Facebook’s display ads include social features (see the ad to right, which includes an endorsement by a Facebook friend), the ads themselves are ordinary.
Facebook’s targeting, however, is groundbreaking: The breadth and depth of the data Facebook has about its users allows advertisers to target ads much more precisely than they can with any other major publisher.
This targeting, combined with Facebook’s vast number of users and pageviews, makes this is a huge business for the company.
Facebook’s display revenue should only continue to grow as it begins to fill out its massive inventory and prices rise.
Facebook ad prices already rose 18 per cent last year, according to Facebook’s IPO filing. According to digital advertising guru Tom Bedecarre, Facebook’s “percentage of inventory viewed versus the advertising sales is still rather small, so they still have a lot more monetization to go.”
However, these display ads are not the ultimate fulfillment of social advertising’s promise. Look at the screenshots below. The Toyota ad is an afterthought juxtaposed against this user’s news feed. Likewise, the display ads on the profile page below are a grab bag of various organisations and events, and the ads are located in the right rail, far from the users’ centre of attention.
Sponsored Stories are one of the most interesting forms of advertising on Facebook. With Sponsored Stories, a brand can turn an action by a user into an ad. Here’s how it works. Let’s say you leave a positive comment on Coca-Cola’s brand page, or use Facebook’s mobile application to check-in on Facebook. Some of your friends will see that notification, but not all of them, simply because they have so much going on in their news feed already.
Sponsored Stories allows a brand to take that notification and turn it into an ad that will appear both on the right-hand side of the page and on a friend’s news feed (see screenshot), thereby ensuring almost all of your friends will see it. It allows a brand to increase the reach of an organic interaction on Facebook. It’s not just a brand selling its message, it’s your friend selling you the brand’s message. That’s potentially very powerful.
It’s why Facebook’s latest suite of ad products, Premium On Facebook, expands on that concept.
Premium On Facebook
In late February, Facebook released a suite of new advertising products called Premium On Facebook. These ads take a major step toward fulfilling the promise of social advertising.
An executive at a global media agency says that Facebook is trying to reinvent the online advertising model as “social partnerships,” away from the impression and click-driven approach that is currently king.
The new suite of ad products is designed to solve a big problem for Facebook advertising, which is the following: Facebook promises brands direct engagement with users, but earning that engagement requires lots of high-touch work (think sweepstakes, promotions and the like). This limits the effectiveness of the platform for brands–and therefore how much they’re willing to spend on it. Premium On Facebook promises to deliver engagement on demand for brands.
The ad units let companies spread content originating on their brand pages throughout the site.
For example, Ben & Jerry’s can take a post from its brand page, use it as a display ad next to users’ news feeds (as in the example above), use it as a post directly in users’ news feeds (on both the desktop and mobile sites), and even use it as an out-sized display ad on the logout page. According to a report in Ad Age, Facebook’s initial asking price for the logout ads is as much as $700,000 per day.
To supplement the new ad products, Facebook also introduced a product called “Reach Generator.”
Content on brand pages is currently only seen by 16 per cent of the page’s fans because the many other updates fans get from friends and other pages swamp the brand’s messages in users’ news feeds. With Reach Generator, Facebook can guarantee that a brand’s content will now be viewed by at least 75 per cent of a page’s fans in a month.
The new products are significant for several reasons.
For the first time, Premium On Facebook lets brands put their message front and centre to an audience that has already opted in to receive updates from that brand. What’s more, the brand also gets amazingly detailed demographics on the audience.
With Reach Generator, brands also know that their content will reach the intended audience—historically a sticking point in online advertising.
Taken together, these elements mean Facebook’s new ad products make it a much more friendly platform for big-ticket advertisers who may have been hesitant to pull the trigger on display ads. Finally, this is Facebook’s first attempt to monetise its 425 million mobile users, who previously saw no ads.
In other words, while before brands had to either buy targeted display ads, or work very hard to generate fans and engagement, Facebook now promises to deliver brands “engagement on demand,” by boosting the reach of their message and showcasing it straight to the heart of users’ Facebook experience.
As we discussed in a recent note, we think this is the business that could accelerate Facebook’s revenue and profit growth.
THE BOTTOM LINE
- Facebook currently generates the majority of its advertising revenue from display ads that are highly targetable but largely not the sort of innovative “social advertising” that many are looking for from the company.
- Facebook recently introduced a holistic content distribution product for brands that we believe points to the future of advertising on the platform.
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