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If Facebook is going to continue to give away its services for free, it needs to make money somehow. Right now the bulk of revenue comes from advertising. Fortunately for the firm, online advertising is hot. For years, online advertising has been the only major media category that has seen an increase in spending (see Chapter 14 "Google in Three Parts: Search, Online Advertising, and Beyond"). Firms spend more advertising online than they do on radio, magazine, cable television, or newspaper ads.D. Takahashi, “Internet Ads Finally Surpass Newspapers,” VentureBeat, April 14, 2011. But not all Internet advertising is created equal. There are both signs that social networking sites are struggling to find the right ad model and trends suggesting that advertising on social networks could be a money-gushing bonanza.
Google founder Sergey Brin sums up early frustration with social media advertising, saying, “I don’t think we have the killer best way to advertise and monetize social networks yet,” that social networking ad inventory as a whole was proving problematic and that the “monetization work we were doing [in social media] didn’t pan out as well as we had hoped.”“Everywhere and Nowhere,” Economist, March 19, 2008. GM pulled a $10 million account from Facebook just days before the social network’s IPO, claiming that paid advertising on the network was simply not effective.J. Muller, “GM Says Facebook Ads Don’t Work, Pulls $10 Million Ad Account,” Forbes, May 15, 2012.
Why has advertising on social networking sites been such a tough nut for some to crack? Firms face two key challenges: content adjacencyConcern that an advertisement will run near offensive material, embarrassing an advertiser and/or degrading their products or brands. and user attention. The content adjacency problem refers to concern over where a firm’s advertisements will run. Consider all of the questionable titles in social networking news groups. Do advertisers really want their ads running alongside conversations that are racy, offensive, illegal, or that may even mock their products? This potential juxtaposition is a major problem with any site offering ads adjacent to free-form social media. Summing up industry wariness, one Procter & Gamble manager said, “What in heaven’s name made you think you could monetize the real estate in which somebody is breaking up with their girlfriend?”B. Stone, “Facebook Aims to Extends Its Reach across Web,” New York Times, December 1, 2008. An IDC report suggests that it’s because of content adjacency that “brand advertisers largely consider user-generated content as low-quality, brand-unsafe inventory” for running ads.R. Stross, “Advertisers Face Hurdles on Social Networking Sites,” New York Times, December 14, 2008.
Now let’s look at the user attention problem.
In terms of revenue model, Facebook is radically different from Google and the high-value category of search advertising. Users of Google and other search sites are on a hunt—a task-oriented expedition to collect information that will drive a specific action. Search users want to learn something, buy something, research a problem, or get a question answered. To the extent that the hunt overlaps with ads, it works. Just searched on a medical term? Google will show you an ad from a drug company. Looking for a toy? You’ll see Google ads from eBay sellers and other online shops. Type in a vacation destination and you get a long list of ads from travel providers aggressively courting your spending. Even better, Google only charges text advertisers when a user clicks through. No clicks? The ad runs at no cost to the advertiser. From a return on investment perspective, this is extraordinarily efficient. How often do users click on Google ads? Enough for this to be the single most profitable activity among any Internet firm. In 2011, Google revenue came in at nearly $38 billion. Profits exceeded $9.7 billion, almost all of this from pay-per-click ads (see Chapter 14 "Google in Three Parts: Search, Online Advertising, and Beyond" for more details).
While users go to Google to hunt, they go to Facebook as if they were going on a hike—they have a rough idea of what they’ll encounter, but they’re there to explore and look around and enjoy the sights (or site). They’ve usually allocated time for fun, and they don’t want to leave the terrain when they’re having conversations, looking at photos or videos, and checking out updates from friends.
These usage patterns are reflected in click-through rates. Google users click on ads around 2 percent of the time (and at a much higher rate when searching for product information). At Facebook, click-throughs are about 0.04 percent.B. Urstadt, “The Business of Social Networks,” Technology Review, July/August 2008. Rates quoted in this piece seem high, but a large discrepancy between site rates holds across reported data.
Most banner ads don’t charge per click but rather CPMCost per thousand impressions (the M representing the roman numeral for one thousand). (cost per thousand) impressionsEach time an ad is served to a user for viewing. (each time an ad appears on someone’s screen). But Facebook banner ads performed so poorly that the firm pulled them in early 2010.C. McCarthy, “More Social, Please: Facebook Nixes Banner Ads,” CNET, February 5, 2010. Lookery, a one-time ad network that bought ad space on Facebook in bulk, had been reselling inventory at a CPM of 7.5 cents (note that Facebook does offer advertisers pay-per-click as well as impression-based, or CPM, options).B. Urstadt, “The Business of Social Networks,” Technology Review, July/August 2008; J. Hempel, “Finding Cracks in Facebook,” Fortune, May 13, 2008; and E. Schonfeld, “Are Facebook Ads Going to Zero? Lookery Lowers Its Guarantee to 7.5-cent CMPs,” TechCrunch, July 22, 2008. By contrast, information and news-oriented sites do much better, particularly if these sites draw in a valuable and highly targeted audience. The social networking blog Mashable has CPM rates ranging between seven and thirty-three dollars. Technology Review magazine boasts a CPM of seventy dollars. TechTarget, a Web publisher focusing on technology professionals, has been able to command CPM rates of one hundred dollars and above, fueling that firm’s IPO.
Facebook and other social networks are still learning what works, and Facebook, app firms, and advertisers have begun experimenting with all sorts of models. Many feel that Facebook has a unique opportunity to get consumers to engage with their brand, and some initial experiments point where this may be heading.
Many firms have been leveraging so-called engagement adsPromotion technique popular with social media that attempts to get consumers to interact with an ad, then shares that action with friends. by making their products part of the Facebook fun. Using an engagement ad, a firm can set up a promotion where a user can do things such as “Like” or become a fan of a brand, RSVP to an event and invite others, watch and comment on a video and see what your friends have to say, send a “virtual gift” with a personal message, or answer a question in a poll. The viral nature of Facebook allows actions to flow back into the news feed and spread among friends.
COO Sheryl Sandberg discussed Ben & Jerry’s promotion for the ice cream chain’s free cone day event. To promote the upcoming event, Ben & Jerry’s initially contracted to make two hundred and fifty thousand “gift cones” available to Facebook users; they could click on little icons that would gift a cone icon to a friend, and that would show up in their profile. Within a couple of hours, customers had sent all two hundred and fifty thousand virtual cones. Delighted, Ben & Jerry’s bought another two hundred and fifty thousand cones. Within eleven hours, half a million people had sent cones, many making plans with Facebook friends to attend the real free cone day. The day of the Facebook promotion, Ben & Jerry’s Web site registered fifty-three million impressions, as users searched for store locations and wrote about their favorite flavors.Q. Hardy, “Facebook Thinks Outside Boxes,” Forbes, May 28, 2008. The campaign dovetailed with everything Facebook was good at: it was viral, generating enthusiasm for a promotional event and even prompting scheduling.
In other promotions, Honda gave away three quarters of a million hearts during a Valentine’s Day promo,S. Sandberg, “Sheryl Sandberg on Facebook’s Future,” BusinessWeek, April 8, 2009. and the Dr. Pepper Snapple Group offered two hundred and fifty thousand virtual Sunkist sodas, which earned the firm one hundred thirty million brand impressions in twenty-two hours. Says Sunkist’s brand manager, “A Super Bowl ad, if you compare it, would have generated somewhere between six to seven million.”E. Wong, “Ben & Jerry’s, Sunkist, Indy Jones Unwrap Facebook’s ‘Gift of Gab,’” Brandweek, June 1, 2008.
The news is filled with stories about employers scouring Facebook to screen potential hires. But one creative job seeker turned the tables and used Facebook to make it easier for firms to find him. Recent MBA graduate Eric Barker, a talented former screenwriter with experience in the film and gaming industry, bought ads promoting himself on Facebook, setting them up to run only on the screens of users identified as coming from firms he’d like to work for. In this way, someone Facebook identified as being from Microsoft would see an ad from Eric declaring “I Want to Be at Microsoft” along with an offer to click and learn more. The cost to run the ads was usually less than $5 a day. Said Barker, “I could control my bid price and set a cap on my daily spend. Starbucks put a bigger dent in my wallet than promoting myself online.” The ads got tens of thousands of impressions, hundreds of clicks, and dozens of people called offering assistance. Today, Eric Barker is gainfully employed at a “dream job” in the video game industry.Eric is a former student of mine. His story has been covered by many publications, including J. Zappe, “MBA Grad Seeks Job with Microsoft; Posts Ad on Facebook,” ERE.net, May 27, 2009; G. Sentementes, “‘Hire Me’ Nation: Using the Web & Social Media to Get a Job,” Baltimore Sun, July 15, 2009; and E. Liebert, Facebook Fairytales (New York: Skyhorse, 2010).
Eric Barker used Facebook to advertise himself to prospective employers.
Of course, even with this business, Facebook may find that it competes with widget makers. Unlike Apple’s App Store (where much of developer-earned revenue comes from selling apps), the vast majority of Facebook apps are free and supported by ads. That means Facebook and its app providers are both running at a finite pot of advertising dollars.
While these efforts might be innovative, are they even effective? Some of these programs are considered successes; others, not so much. Jupiter Research surveyed marketers trying to create a viral impact online and found that only about 15 percent of these efforts actually caught on with consumers.M. Cowan, “Marketers Struggle to Get Social,” Reuters, June 19, 2008, http://www.reuters.com/news/video?videoId=84894. Brands seeking to deploy their own applications in Facebook have also struggled. New Media Age reported that applications rolled out by top brands such as MTV, Warner Bros., and Woolworths were found to have as little as five daily users. Congestion may be setting in for all but the most innovative applications, as standing out in a crowd of over 550,000 applications becomes increasingly difficult.Facebook Press Room, Statistics, April 29, 2010, http://www.facebook.com/press/info.php?statistics.
Consumer products giant Procter & Gamble (P&G) has been relentlessly experimenting with leveraging social networks for brand engagement, but the results show what a tough slog this can be. The firm did garner fourteen thousand Facebook “fans” for its Crest Whitestrips product, but those fans were earned while giving away free movie tickets and other promos. The New York Times quipped that with those kinds of incentives, “a hemorrhoid cream” could have attracted a similar group of “fans.” When the giveaways stopped, thousands promptly “unfanned” Whitestrips. Results for Procter & Gamble’s “2X Ultra Tide” fan page were also pretty grim. P&G tried offbeat appeals for customer-brand bonding, including asking Facebookers to post “their favorite places to enjoy stain-making moments.” But a check eleven months after launch had garnered just eighteen submissions, two from P&G, two from staffers at spoof news site The Onion, and a bunch of short posts such as “Tidealicious!”R. Stross, “Advertisers Face Hurdles on Social Networking Sites,” New York Times, December 14, 2008.
Efforts around engagement opportunities like events (Ben & Jerry’s) or products consumers are anxious to identify themselves with (a band or a movie) may have more success than trying to promote consumer goods that otherwise offer little allegiance, but efforts are so new that metrics are scarce, impact is tough to gauge, and best practices are still unclear.
Concerns over Facebook’s ad model were underscored when growth slowed in the two quarters prior to the firm’s IPO.H. Blodget, “Well, Now that Everyone Has Sobered Up, Let’s Figure Out What Facebook is Actually Worth…” Business Insider, May 21, 2012. For all these challenges and limitations, however, Facebook advertising had grown at a rate strikingly similar to Google’s early ad growth trajectory.Eric is a former student of mine. His story has been covered by many publications, including J. Zappe, “MBA Grad Seeks Job with Microsoft; Posts Ad on Facebook,” ERE.net, May 27, 2009; G. Sentementes, “‘Hire Me’ Nation: Using the Web & Social Media to Get a Job,” Baltimore Sun, July 15, 2009; and E. Liebert, Facebook Fairytales (New York: Skyhorse, 2010). There are several reasons for this spectacular growth.
First is the advertising appeal of precise targeting. Large advertising networks have tried to meticulously track users to develop a profile of their demographics, likes, and interests. At Facebook, the site knows all about you because you’ve told it the details—your age, the things you’re enthusiastic about, where you live, your relationship status. This opens up all sorts of targeting opportunities to even the smallest of advertisers. In one example, a wedding photography studio targeted ads at women aged 24 to 30 whose relationship status was engaged—that’s like sticking a flier in front of precisely everyone you want to reach and not wasting a dime on anyone else. The firm, CM Photographics, reports that just $600 in Facebook ads resulted in nearly $40,000 in revenue.M. D’Onofrio, “Social Networking Sites Using New Advertising,” BrandingIron, November 18, 2010.
Another key comes from leveraging social engagement in the ads themselves. Adding a “like” button to an ad allows firms to turn their advertising message into a trusted referral from users’ friends. Making ads more social allows advertisers to engage consumers to comment on content, RSVP to an event, and more. Many of these ads are designed to allow interaction within the ad that keeps them on the page so that users aren’t faced with a choice to deviate from their “hike.” And while user “Likes” and other updates might be lost in the constant scroll of the news feed, Facebook also lets advertisers pay to create sponsored stories, allowing advertisers to turn a member’s Facebook actions (status updates, check-ins, “likes”) into an ad on the right-side of the screen.
These videos show how both engagement ads and sponsored stories work.
Source: Used by permission of Facebook.
Click to watch: https://www.facebook.com/video/video.php?v=10100328087082670
While Facebook’s overall click-through rates are low, Facebook execs argue that people remember ads better and are more likely to make purchases when their friends endorse products. Says one ad exec, “If you’re an advertiser, there’s nothing better than converting customers into unpaid endorsers.”B. Stone, “Why Facebook Needs Sheryl Sandberg,” BusinessWeek, May 16, 2011. Perhaps most critical—if someone “likes” your firm’s page, you’ve got ’em. You can now post status updates that show up in a user’s feed, allowing your message to appear in the same stream as postings from friends and to further spread virally. Users, of course, can turn off firm messages if they “unlike” a firm, and users are in control of their social ad participation through Facebook’s privacy settings, but this ability to connect to customers in a way that enables continued messaging and promotion is a huge draw for advertisers and gives Facebook ads a unique appeal that none of its rivals can match.
While Facebook doesn’t sell banner advertisements, the products described above are considered display ads. Facebook serves three times more display ads than anyone else online.M. Walsh, “Facebook Drives 31% of Display Ads in Q1,” MediaPost, May 4, 2011. As for the increased spending by advertisers on Facebook, only time will tell if GM’s experience is an anomaly or a troubling trend and if Facebook can create new promotional mechanisms to further fuel growth.P. Kafka, “Facebook Isn’t Eating Google’s Lunch Yet, but It’s Getting Hungry…,” AllThingsD, March 13, 2011.