Understanding Facebook Advertising

Facebook UsersOver one-third of the internet population are Facbeook users (click to enlarge)

Photo: Facebook S-1, CIA World Facetbook, International Telecommunications Union, BII Estimates

In a few months Facebook will go public at a reported valuation of $75 to $100 billion. It will be the biggest tech IPO since Google in 2004 and is expected by many to be an era-defining event of sorts.Facebook generates the vast majority of its revenues from advertising.

For 2011, advertising represented 85 per cent of revenues, down from 95 per cent in 2010. The balance is from “payments and other feeds revenue,” which is a 30 per cent cut that Facebook takes from Zynga and other companies that take payments over its platform.

While there has been a lot of public hand wringing about whether Facebook can grow into its valuation, this overlooks the core question: Does Facebook have the products to grow into its valuation? Are companies using Facebook’s ad products and why?

To better understand this issue, we recently chatted with an executive from a global media agency to get his thoughts about advertising on Facebook, how companies are engaging with the platform, and what they need to expect.

This is what he told us:

  • Money budgeted for Facebook campaigns is increasing rapidly.
  • Facebook is a powerful tool for building and managing fan bases.
  • Companies need to gauge and prepare for adverse user reaction.
  • Facebook’s new ad platform sounds great for marketers but could backfire by cluttering the user experience
  • The analytics are a dud.

Facebook’s Advertising Model: Social Partnerships
First things first, he told us that Facebook is the “single largest platform you can advertise on.”

Furthermore, he says budgets for Facebook campaigns are “increasing rapidly.” The money is primarily coming from elsewhere in the media budget, but he thinks companies should begin looking at the promotional or CRM budgets instead.

What also immediately became clear was how difficult it is to define what exactly qualifies as “advertising” on Facebook. Companies are spending a lot of money in consulting fees for campaigns that may not have any ads as we traditionally think about them. This includes creating content for a brand page or giving away gift certificates to fans for inviting X fans to the page.

As we argued in a recent note, we believe the future of social advertising is the seamless integration of content and advertising, or “content as advertising.” While the media exec thought that advertising and content have been been heading towards a convergence for a while now, he agreed that Facebook has accelerated this trend.

Social Networks: Average Time SpentThat’s a whole lot of engagement

Photo: comScore

Ultimately, how a company uses Facebook’s platform comes down to its objectives. If a company’s goal is awareness-building, he told us their mix will skew as much as 85 per cent display ads. However, he has found that for a lot of companies Facebook is about building, monitoring, and managing a fan base.This highlights an important point: Facebook requires continuous engagement.

One thing the exec repeatedly stressed is that companies need to be prepared for negative user reactions and how to best manage them. For example, one of his clients launched a big Facebook promotional campaign for a new product it knew would be divisive among its fans. They didn’t kid themselves and acknowledged from the get-go that 49 per cent of their fans wouldn’t like the product and subsequently mapped out strategies to handle user reaction based on various scenarios. In other words, Facebook is not a good advertising platform for the wilfully ignorant or faint of heart: companies can lose control of their message pretty quickly if they aren’t careful.

The media exec was largely positive about Facebook’s new advertising initiatives (click here to read our note about the announcement). He thought the changes made Facebook’s platform a more powerful tool for companies. However, he also struck a cautionary note. The announcement was entirely focused on Facebook’s business partners, he think it will eventually face a backlash if the platform starts becoming too commercial.

While Facebook’s ad products have been mostly focused on display advertising, we believe its latest products are aimed at helping brands grow and engage fan bases. Facebook previously didn’t make any money off content produced for brand pages—and probably realised display ads were never going to be a $100 billion business. However, by letting brands spread that content across the site—for a fee, of course—Facebook now lets companies build and manage their fan bases on a grander scale with even greater reach. Furthermore, it should only further accelerate the convergence of advertising and content because any barriers between the two have effectively been broken down in Facebook’s new ad products.  

Finally, when we asked the media exec about analytics, his response surprised us, “Given what they’re capable of, it’s elementary school.” He said that Facebook is trying to move away from the numbers-heavy online advertising model in favour of “social partnerships,” which he thinks is generally a good idea. However, if a company is trying to improve their social strategy, he says they’re better off talking and listening to others rather than leaning on Facebook’s analytics.

One interesting sidenote worth sharing: He told us ad agencies only need Facebook to be one-tenth the size of Google to make the same amount of money. When a company decides to run a search campaign, the agency traditionally gets paid a 10 per cent commission of the total ad buy. However, when a company opts for a Facebook campaign they pay a consulting fee directly to the agency or their specialised social media subsidiary. In other words, a $10 million Google campaign is worth just as much as a $1 million Facebook campaign in the eyes of the agencies.

THE BOTTOM LINE

  • Facebook is an unparalleled advertising platform in size, but requires continuous engagement.
  • Facebook is largely being used by brands to build and manage their fan bases.
  • Until recently, it seems like Facebook had no way to really monetise this behaviour.
  • Facebook’s new suite of advertising products are an attempt to cash in on audience-building across its platform.
  • Facebook’s analytics are disappointing given their capabilities.
  • From the perspective of advertising agencies, Facebook doesn’t need to beat Google—it only needs to become a fraction of the size.

MOREClick here for our note on what Facebook’s new advertising initiatives say about social →

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