Facebook’s $0.001 business model


“Facebook Just Blew Away the Competition in Display Ads!” bellows Business Insider. Yes! Ah, hyperbole and the agents of change who follow it. You’d think Facebook is crushing Yahoo and Google with ad revenue from that headline, right?

Um, no. Here’s a calculus secret — and we know you flunked math in high school which is why you went into advertising, so we’ll type slowly here — advertising impressions don’t exist. Impressions are really a currency by which media planners judge options on where to place ad investments. Take Facebook. Social media site users refresh their streams constantly; unlike a reader pouring over NYTimes.com, an FB newsfeeder is clicking again and again, looking for the latest old girlfriends or Bejeweled update. Silicon Alley Insider suggests Facebook has a run rate of 720 billion display ad impressions a year, which works out to 1,800 per user. If you’re a heavy Facebook user, one of the top 10% who really check the site, given a 10-to-1 skew in usage (math, sorry) you may receive 18,000 display ads pitched at you annually.

How many of those Facebook display ads do you recall?

Can you name five?

Three?

Right-O. In our agency’s client work, Facebook ads can perform brilliantly if purchased on a cost per click basis — meaning you only pay if someone sees the ad, likes it and clicks through to learn more — but fail miserably when evaluated on impressions. Click-through rates, a good apples-to-apples proxy indicator of whether users are interested in an ad offer, average 0.02% on Facebook vs. the 0.08% average of banner ads in the U.S. Do the math (sorry, sore point) and Facebook users are one-quarter as likely to actually see the banner image in the back of their retina vs. those other colorful boxes at the top of NYTimes.com. Or, (more math) Silicon Alley Insider estimates Facebook made $700 million back in 2009, about $2 per user at the time. Given 720 billion annual display “impressions,” that equals (yes, math, but wait for it!) $0.001 revenue per ad served.

Facebook advertising, WOOT!

We know. OK. Can you name just one Facebook display ad?

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4 thoughts on “Facebook’s $0.001 business model

  1. Actually, if you have a decent ad and can target well, you can get a VERY good deal paying on a CPM basis. Taking my own Facebook ads as an example, I actually get a lot of leverage in NOT paying on a cost per click basis- my average CTR is 0.144%, and therefore my effective cost per click is much lower than it would be if I were explicitly paying for clicks.

    I’m not pointing this out in order to brag, I’m pointing this out because the choice of CPC versus CPM pricing is not nearly as clear as you make it seem, and the ads don’t necessarily “fail miserably when evaluated on impressions.” I do think that people pay attention when ads are relevant to them, so the burden is really on the advertiser to be as smart as possible in targeting and to come up with a creative that is eye-catching enough to not have people pass it by.

    Lastly, yes, I can name Facebook display ads. One was for an Arizona immigration policy sticker, which I ordered, and one was for ModCloth.com, which I have since purchased 3 items from. I just can’t remember the ones that are not relevant to me…but the burden for relevance is certainly on the advertisers and not on Facebook, since Facebook has gone above and beyond in providing useful options for targeting compared to other outlets.

  2. These are fair points, Jodi! And some campaigns can work well. I do think the fact that FB revenue trails so far behind other online media — while its impressions lead the pack — shows the ad dollars are not following all these impressions. Since advertisers invest based on what drives results, it follows logically that results are still not optimal from FB vs. other online channels.

    By the way, I adjusted a math error. Will teach me to get all snarky before double-checking my own calculator. However, my thesis stands!

    Thanks for stopping by.

  3. Well said. I’ve seen similar results. People can probably blow through 30+ pages/minute when obsessing over friend’s photos. They know exactly where to look on the page, so they never see the ads. Each page has more than one ad, so the impressions add up fast . . . for Facebook.

  4. Facebook users are often just wasting time. Ads are interrupting their browsing and you need to create ads to get their attention.

    That’s where I think their advertising model is interesting – CPM or PPC. Go with the CPM model and get as many click as possible or pre-qualify your visitors and pay per click?

    It all depends on the product or service you are selling and your goals.

    @ED – The ads do not always change when you look at new pictures but they do change often.

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