Facebook: It’s About Engagement [Research]

Facebook’s Advertising Opportunities and Challenges

Facebook -it's about the engagement not the advertisingFacebook—Wall Street is all a buzz about its lackluster performance following its historic IPO. To put a Shakespearean spin on Facebook’s experience, I come not to bash Facebook but to support it. Let’s face it—Facebook’s not disappearing any time soon. (Here’s 5 ways Facebook’s IPO will affect marketers and charts related to the IPO.)

Facebook: It’s About Engagement

Unlike the banks, Facebook’s problem isn’t that it’s too big to fail but rather that its raison d’etre is about the engagement, not the dollars. People are active on Facebook because they want to engage with family, friends, colleagues and social media contacts. Facebook helps people keep up with what’s happening with those they care about.

As a result, Facebook’s advertising model is challenged. Its problems extend beyond the downturn in Facebook’s advertising revenue growth. The issue is that  Facebook participants aren’t interested in ads. 83% hardly ever or never click on Facebook ads or sponsored content according to a May 2012 survey by the Associated Press and CNBC.
Facebook participants don't click on ads or sponsored content

Adding to Facebook’s advertising challenge is the fact that users move around the site spending little time on any one page. As a result, ad impressions don’t yield the same level of attention as on other sites and media platforms. This isn’t a new phenomenon. MySpace had the same advertising issues. No media buyer worth their salt would have chosen MySpace over Yahoo.

Despite being targeted, Facebook’s advertising works best when it encourages social media action, not branding or sales with which advertisers can associate ROI. Based on Social Fresh’s Facebook advertising research, 44% of marketers use Facebook for conversions. Most of these ads are doomed to fail since only a small percentage of users are in buying mode at any given time and the ads are looking to take users off of Facebook. While about a third of marketers seek engagement, these Facebook advertisements promote companies’ social media efforts at an added expense. Advertisers goals on Facebook miss the mark

GM gets social media marketing

That GM got press when they announced they were pulling their advertising from Facebook exemplifies this. While GM’s advertising on Facebook made it a relatively large advertiser, it only accounted for 3% of GM’s total advertising budget! Read further and you’ll see that GM isn’t abandoning Facebook. They’re refocusing their social media investment to their Facebook page, but NOT buying advertising. From a marketing perspective, they’ve shifted their investment to content creation and engagement. This is in line with how participants use the platform. Unfortunately, it doesn’t generate revenue for Facebook.

Facebook’s 3 revenue challenges

While Facebook can find revenue opportunities, the growth potential of these opportunities is limited by the firm’s current size.

  1. Has limited new, untapped markets outside of China. Facebook reaches most of its potential market around the world and across all age segments, assuming China and people under 13 years old are off limits.
  2. Has limited ability to extend time spent on site. Facebook already accounts for one out of every five minutes spent online. While it can increase time on site somewhat, it can’t significantly increase it without providing incremental value in the form of content and engagement for participants. The potential scenarios would have them compete with other online giants such as Google (including YouTube), Apple and Amazon.
  3. Has to prove “Likes” translate to revenue for marketers. This is a difficult hurdle to overcome. Research shows that consumers follow (“like”) brands for the promotions and unlike for a variety of inconsistent reasons. (Here’s what a Facebook like is worth to marketers.)

3 Facebook revenue opportunities

Facebook must recognize that it’s in a maturing marketplace. While it can improve revenue creation, it’ll be at a lower rate of growth. As a mature business, Facebook should think in terms of incremental improvement. Here are three options.

  1. Improve Facebook advertising effectiveness. Facebook must examine its current advertising to determine how to use its data to make it more effective in achieving marketing goals. This includes mobile advertising that hasn’t been introduced yet.
  2. Create new Facebook marketing features. Facebook must insert itself into the marketing equation for fan pages to collect some form of fees. This is a big change in how it does business so there’d be push back from marketers and agencies. Facebook can make the case based on the fact that major marketers need to be present on Facebook due to the sheer number of members. It’s just changing the old media equation.
  3. Sell user data in a way that’s not slimy. While an old fashioned, direct marketing approach, Facebook could find a way to leverage access to its customer data in a way that doesn’t hurt anyone’s identity or privacy. Two elements that aren’t a slam dunk since there’s already a $15 billion court case filed against Facebook involving data privacy.

The bottom line is that marketers will continue to use Facebook to create fan pages and engage fans. Many of these started without the marketers. Concurrently, Facebook will find ways to expand their revenues since marketers will be willing to spend something to get access to their audience. The challenge is that it probably won’t reach the levels anticipated by Facebook’s IPO.

What’s your opinion about Facebook and will you continue to use it for marketing?

Happy marketing,
Heidi Cohen

Note: Article was updated on May 22, 2012 at 10:45am to include research reported in eMarketer.

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