The key question that will decide the future of Twitter’s business is how its ads perform.
For Twitter to be worth the amazing valuations thrown at it, it needs to show very fast revenue growth, which means it has to have an ad solution that agencies love and delivers something they want.
And the only way to figure that out is to learn from someone who has actually used Twitter ads. It turns out Gabriel Weinberg, founder of indie search engine DuckDuckGo, has, and has written about it.
His pretty entertaining story revolves around finding a trending hashtag that sounded like his company’s name and deciding to build a micro-site and buy a Twitter ad to promote it. (We interviewed Weinberg on his quixotic quest to dethrone Google here.)
So, how did the Twitter promoted ad work?
Here’s the bottom line, from Weinberg’s experience: Twitter ads make clicks expensive but have great engagement.
Weinberg’s ad buy worked out to 17 cents per click to his microsite, which is pretty expensive.
So, Twitter’s doomed, right? If its clicks are too expensive, advertisers can just get them elsewhere?
This is great for Twitter, and here’s why: online advertising based on clicks is only half of internet advertising (the half that Google dominates). It’s called direct-response advertising, or advertising that is expected to lead directly to a sale.
When you’re doing direct-response advertising, your cost per click is all-important because you’re basically trying to optimise to the cent how much you spend on each sale versus what you make.
But as we said, this kind of advertising is only half of the $26 billion+ online advertising pie.The other half is brand advertising. Brand advertising is also meant to increase sales, but not directly.
TV ads are the ultimate brand ad: you’re never going to rush out and buy a Bud because you see an ad for it on TV, but countless studies have shown that once you see a bunch of Bud TV ads, you’re more likely to buy a Bud days later in the supermarket.
And for brand advertising, engagement is the holy grail.
And Twitter has very good engagement rates. Weinberg’s campaign had engagement rates around 5%, which is very high for online advertising. (Twitter defines “engagement” with a promoted tweet as a clicks, retweets, favourites and replies.)
Online advertisers love engagement. Most of us are desensitised to traditional online brand advertising — the boring banner ad — but we’re not yet desensitised to interactive, social, timely ads on Twitter. So we engage with them. And that means that Twitter can offer a product to agencies and buyers that they can’t get anywhere else, and has at least one characteristic which is very good.
Which means Twitter will probably have very strong revenue growth.
Which means Twitter is probably worth a ton of money.