Here's What We Know About Facebook Advertising

Lots of people are calling into question the effectiveness of Facebook advertising products, right at the time of its IPO. We thought it would be a good time to revisit our research on Facebook ads.

Facebook Ads: Are They Effective? 

Facebook revenue makeup (updated for Q1 12)

Photo: Facebook filings

The answer you won’t like: yes and no. It depends on what you want. 

Facebook ads are not effective at driving transactions and immediately creating or harvesting purchasing intent, the way Google ads are. 

They are, however, very effective at doing what display ads do, which is be shown to a lot of people and hopefully increase notoriety and things like brand recall. They let you tailor and target your ads to very specific demographics. 

Facebook can also be useful for things like engaging your users, building a relationship with them and spreading content to them. 

We analysed Facebook’s business opportunity in depth here →

Here Henry Blodget points out that Facebook’s ad produt is vastly different (and inferior) to Google’s →

Is That It? 

Premium On Facebook

Sorry… yes and no. Yes: yes, right now, that is it. 

No: Facebook is hard at work on new ad formats that prove more effective. 

One way is Premium Facebook Sponsored Stories, which push stories by companies in users’ new feed. It’s a new ad format that Facebook is pushing, which allows companies to push stories to most of their fans. Only a fraction of fans see any individual piece of content that a brand puts out, but with Facebook’s new offering brands can push this content to almost all their fans.

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We believe this is potentially very powerful because it poshes ad messages to people who have already opted-in to receive them–who are fans of that company. And it promises to turn these messages into viral ads through Facebook’s graph. We analysed this business opportunity in detail here →

Another thing that could be very powerful which we broached: One of the most tantalising findings of our discussions with insiders in the Facebook ecosystem is that Facebook ads might lead to transactions in a way that’s not measured but may be measurable. Here’s how we put it in a note about a discussion with James Borow, CEO of GraphEffect, a startup that helps brands manage advertising on Facebook:

“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 [,” Borow said.] Because that second-order effect isn’t usually tracked, Facebook ads seem to have a much lower ROI than they do. […] “I often refer to it as the death of the click. 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[.]

If Facebook can figure out a way to measure and scale this idea, it could threaten to cannibalise Google’s business. 

Do People Like Facebook Ads?
In our conversation with industry insiders, we found that many of them don’t like Facebook ads. They’re simply not drinking the kool-aid, because they can’t measure that ads are effective in any particular way. We explored this here →

They also have more specific gripes, namely a lack of reliable APIs, ownership of data and content, and analytics. We explain what that means here →

Does That Mean Facebook’s Toast?

Facebook Quarterly Revenues Growth

Photo: Facebook S-1

Ha! No. Even though we could find some people who didn’t like Facebook, and more people who had gripes, most people in the industry we’ve spoken to agree that Facebook budgets are growing. Many say they will double in the next year. 

What’s more, at the end of the day, markets clear. Facebook is a pageview monster. As long as those pageviews exist, people will be willing to pay to put ads on them. They may not be willing to pay much. But they’ll be willing to pay.

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