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Facebook’s Advertising Challenge

With all of the excitement lately about Facebook’s IPO and the real value of the company on the stock market, Facebook’s earning potential has come under the microscope and many people are now questioning the value of their marketing on the site. In May General Motors cut their Facebook advertising campaign by $10 million saying that their ads on Facebook had little impact on their customers’ decision making process1. The contribution that social media marketing makes to the overall conversion rate of internet marketing campaigns has begun to be analyzed more accurately lately and the focus of the way that Facebook advertising is being used has presented the largest social network with some difficult challenges if it is to succeed as a major company as well.

With a profit of over $4 billion in 2011, 95% of which has come from advertising2, GM’s withdrawal isn’t going to have a major impact on Facebook’s bottom line but it is indicative of part of the problem that Facebook faces as an advertiser. Most people go onto the site to socialize and so most of them will totally ignore the advertising that inhabits the right hand column of the newsfeed. Facebook ads have been shown to perform at about half the rate of traditional banner ads, well below the industry standard of a 0.1% click through rate (CTR)3 and as many as 44% of Facebook users will never click on an ad4. To try and remedy this Facebook has built its advertising to take advantage of users’ social networks with sponsored stories and ads that tell you what your friends liked targeting potential customers. This has worked to some degree as the general value in all social media marketing is to raise brand awareness. The difficulty for most businesses is in measuring how much that contributes to overall sales returns. Another major problem that Facebook is yet to overcome is the lack of advertising to its growing network of mobile users. The company faces the odious option of including some sort of advertising in the newsfeed to overcome it or allowing it to continue without any advertising to a large percentage of the user base.

A large part of the problem may also be a natural antagonism that Facebook users have for advertising on the site generally, an animosity that even seems to be shared by the company’s founder Mark Zuckerberg who seems disdainful of advertising on the site even though it consistently accounts for around 90% of the site’s revenue every year5. Facebook has to find a way to include advertising on the site that adds value for users while giving business the sort of exposure that the site has always promised to deliver. To do that the company has to understand that high quality, targeted advertising will actually improve the users’ experience of the site, not ruin it. The rapidly emerging social image sharing site Pinterest is proving this at the moment with a growing share of e-commerce referrals coming from the site at the expense of Facebook6.

On the other side of the fence, marketers have to understand that Facebook advertising is never going to be about CTR, it is always going to be a tool for raising brand awareness. This means that the real measure of a successful marketing campaign on Facebook will be measured in reach and the visibility that it gives to brands. The growing importance of how many people are talking about brands on Facebook is going to see the accent in effective advertising on the site shift to customer engagement and the use of a company’s brand pages to involve their customers in conversation. The question remains if that is enough marketing clout to justify a $100 billion price tag.

References:
1. http://online.wsj.com/article/SB10001424052702304192704577406394017764460.html

2. http://www.bloomberg.com/news/2011-09-20/facebook-revenue-will-reach-4-27-billion-emarketer-says-1-.html

3. http://mashable.com/2011/01/31/facebook-half-click-throughs/

4. http://venturebeat.com/2012/05/17/44-perecent-facebook-never-click-display-ads/

5. http://marketingland.com/wsj-gm-to-drop-facebook-advertising-worth-10-million-as-ipo-approaches-12111

6. http://econsultancy.com/uk/blog/9567-pinterest-revenue-per-click-beats-facebook-twitter-report

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