It’s been a rough few weeks for Facebook — not to mention its shareholders. After going public at $38 per share in May, the social networking titan has lost nearly half its value, wiping out some $50 billion worth of shareholder equity. (Of course, Facebook insiders cashed out to the tune of nearly $10 billion during the offering, but hey, some people have good timing.) Key executives are racing for the exits faster than Usain Bolt, prompting concerns of a brain-drain. Meanwhile, the state of California is bracing for the loss of potential tax revenue due to Facebook’s nose-dive. Calls are mounting for founder Mark Zuckerberg to step aside. And there’s reason to believe that Facebook’s “market meltdown” isn’t over.
As Rob Cox at Reuters wrote Monday:
All the red flags that were flying when the company debuted – overpriced shares, shoddy corporate governance, huge challenges to the core business and a damaged brand – remain at full mast today. In this respect, Facebook looks like a proverbial example of what’s known on Wall Street as a falling knife – that is, one that can cost investors their fingers if they try to catch.
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Against this deteriorating backdrop, it’s worth taking a step back to ponder one of the more existential questions about Facebook: Do the company’s ads work? Is Facebook advertising a good value proposition for marketers? It’s an issue that came to the forefront just days before the company’s IPO, when auto giant GM yanked its ads from Facebook after concluding they have “little impact on consumers’ car purchases.” (Last week, the GM marketing executive behind that decision, Joel Ewanick, resigned from the company, and GM has said it might resume advertising on Facebook.)
Facebook’s strategy is based on the premise that “social” is the future of the online advertising business. It’s the idea that recommendations from friends and companies alike are going to be more effective than traditional display advertising at driving consumer behavior.
That’s the theory, anyway. But is it true? In order to get a handle on the effectiveness of Facebook advertising for marketers, I reached out to Andrew Lipsman, VP of Industry Analysis at comScore, and co-author of the recent study, “The Power of Like: How Social Marketing Works.” The study was a collaboration between comScore and Facebook, and relied on the social network’s closely-held internal analytics platform, as well as proprietary comScore analysis and other data. ComScore conducts dozens of major studies every year working with industry partners, and after speaking to Lipsman over the last week, I’m confident about the integrity of the findings. Here are the main points from the study, and from my conversation with Lipsman.
Yes, Facebook ads can work. But there are different types of ads, and certain types work better for some marketers than others do, according to Lipsman. “Facebook ads can absolutely drive advertising effectiveness,” he says, “but there aren’t enough data points to generalize yet” with a broad brush statement like “Facebook ads work,” or “Facebook ads do not work.” It’s simply more nuanced than that, and there are many variables at play, including the type of ad, as well as color, location and creative elements. “This is a totally new platform,” says Lipsman. “There are some unique aspects to it, and we’re still in the early days. This process will play out over the next couple of years.”
Crucially, Lipsman says, there is simply not enough data to generalize about the effectiveness of Facebook ads compared to other big online publishers like Yahoo and AOL. That’s an important caveat, one that reflects just how nascent Facebook’s ad platform really is.
“Exposed” fans and friends of fans do, in fact, spend more. The study looked at online and offline purchase behavior of fans and friends of fans for Amazon, Best Buy, Target and Walmart during the 2011 holiday shopping season. The researchers measured that purchase behavior against spending by the general population. Not surprisingly, the study found that “fans” of retailers, on average, spent significantly more at those stores than did the general population — more than twice as much at Amazon, Best Buy and Target, and almost that much more at Walmart. Much more impressive and to the point, however, is that “Friends of Fans” also typically spent more — only 8% more at Amazon, but a striking 51% more at Target and 104% more at Best Buy. That would seem to be a clear-cut, if modest, early validation of the social advertising thesis.
(MORE: Why Facebook’s IPO Matters)
Paid media vs. owned media vs. earned media. The study differentiates between three types of marketing on Facebook, as follows:
Brands use display ads and other paid media (Paid) to attract Fans to the Brand Page (Owned), which serves as a platform for marketing communications that reach Fans and Friends of Fans (Earned) in the News Feed and other sections of the website.
Historically, many online advertising campaigns have been measured through paid advertising “click-through rates,” Lipsman says, which is simply the number of times an ad is clicked per 1,000 impressions. (An “impression” is a single ad appearing on a web page. In traditional online advertising, the cost a marketer pays to display an ad is measured per 1,000 impressions (CPM).) But Facebook is “a medium where click-through rates are known to be lower than average for many campaigns,” according to the study.
In contrast to paid media, earned media is a message — or impression — sent to you by a brand you’ve “liked,” which typically shows up in the news feed. The key question, according to Lipsman, is this: “What is the behavior as a result of just the impression and not the click?” Unlike traditional web publishers, Facebook’s ad effectiveness is better judged on the basis of the “behavioral lift” from the message a user has received after they’ve already liked the brand. That, after all, is what most clearly differentiates Facebook ads from traditional online advertising.
The goal is reaching what Lipsman calls a “qualified audience” — people who are more likely to make a purchase as a result of being exposed to a Facebook ad. In that sense, Lipsman says, Facebook advertising is similar to television advertising, where the goal is to create a positive association with a brand in the mind of the consumer, one that makes that person a more likely buyer.
Virality is key. A crucial component of Facebook’s value proposition is the sheer scale of the social network, which boasts nearly 1 billion users — something that Facebook COO Sheryl Sandberg has repeatedly emphasized. “If you’re an advertiser, you can leverage fans of your brand to reach friends of fans,” says Lipsman, who calls this the “Birds of a feather flock together” effect. For example, fans of a brand might be two times more likely to make a purchase, but friends of fans might be 1.5 times more likely to do so. “Amplification” is the key dynamic here:
The idea behind amplification is that Fans who are reached with brand messages can also serve as a conduit for brand exposure to Friends within their respective social networks… Due to factors like Fan Reach, the average brand message from the Top 1,000 brands on Facebook is able to deliver an actual amplification of 81x if their efforts are maximized. In practice, while organic virality at times falls short of this ideal scenario, brands are often able to double the reach of their Page Posts through Friends of Fans.
Take Starbucks and Target: “In the case of Starbucks, exposed Fans and Friends of Fans showed statistically significant lifts in in-store purchase incidence for each of the four weeks following earned media exposure,” the study found. “This same latent effect was observed in the lift in purchase incidence among exposed Fans and Friends of Fans of retailer Target.”
It’s still early. “We’re still in the early days of proving out this medium,” says Lipsman. “We’re literally learning new things every month.” Likewise, social media marketing measurement is still in its early days, and much more research is needed. “Despite significant recent advancements in social media measurement, the collective understanding of this dynamic and emergent marketing channel is still in its nascent stages,” the study concludes.
As a whole, the study should be encouraging for Facebook. As someone who has never clicked on a Facebook ad in five years, I was skeptical. But the study contains empirical evidence showing that certain kinds of Facebook advertising, particularly earned media, can be effective. And as Lipsman points out, it’s still early, which suggests there is substantial upside potential for Facebook’s ad business. With nearly one billion users, Facebook has achieved massive scale, and thanks to “amplification” across such a huge network, marketing messages can spread to a degree unprecedented in the history of online media. Against the backdrop of a pretty dismal few months, that’s something Facebook can look forward to.