I had lunch in San Francisco with a source close to Facebook today, and we got chatting about who really advertises on the social network.
A huge aspect of Facebook’s business revolves around small- and medium-size businesses and “direct response” advertisers. These clients typically start with small Facebook budgets, which are increased as they generate more sales. More ads = more sales, and more sales = more ads, in other words. They’re really cheap, and clients can get rolling for as little as $US50.
Facebook’s most expensive ad product, the new autoplay video ads, are currently conspicuous by their absence. COO Sheryl Sandberg recently said they won’t be coming soon. The product was launched in March, but so far hardly anyone has seen them. They have an astronomical reported price tag of up to $US2.5 million.
And that reminded me of a story I heard about how Facebook arrived at the $US2.5 million number — the equivalent of a Super Bowl ad.
I pass this on as gossip only. It’s from an informed source, which makes me think there’s a kernel of truth. But I’m not suggesting this is the “real” reason Facebook decided to start competing with the Super Bowl. And Facebook certainly doesn’t endorse this story. (Nonetheless, I’ve heard similar stories before.)
Basically … a few years ago, Facebook salespeople would go to the big ad agencies and try to persuade them to run ad campaigns on Facebook. Ad agencies tend to deal with clients who have TV budgets of tens of millions of dollars. When they saw that even a big client would spend only a fraction of that on Facebook ads and still get a positive return on investment from sales, the ad agencies turned their noses up. On its face, this doesn’t make any sense: Why wouldn’t you want to tell your client about a cheap and efficient way of generating new sales?
Turns out that ad agencies aren’t always interested in cheap and efficient. They like huge TV budgets, where it’s often not clear what the ROI is. Agencies take fees and commissions on those budgets, so the bigger they are the richer ad agencies become.
The Facebook salespeople came away from their meetings thinking, if agencies don’t want to deal unless the budgets are in the millions of dollars, then let’s give them a product that costs millions of dollars.
So they went back to the agencies and said, “Hey, you can reach 100 million people on Facebook every evening: Would you buy a video ad if it cost $US2.5 million?”
Of course, the agencies said yes. That’s the kind of budget that moves the needle when it comes to ad agency finances.
A cynic might suggest, therefore, that the only reason video ads exist on Facebook is because Facebook figured out that traditional ad agencies wouldn’t spend money unless they knew it was being wasted in the same way TV ad budgets are often wasted
I’m not suggesting that, of course. That just what the cynics are saying.
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