As Facebook is all set to go public, one lingering question that persistently looms: does advertising on the popular social network really work? Advertisers reveal they are still not fully sure what they are actually getting in return for their dollars. This also has created a dilemma for investors and bankers to decide whether or not the networking platform deserves such a lofty valuation sought by it – $100 billion or thereabout.
Just a week or so ago, the company has indicated that its advertising growth does not always move up. Its first-quarter ad revenue has increased 37 percent ($872) million on Y-o-Y basis, but it’s down 7.5 percent from the previous quarter. Facebook has attributed the decline to ‘seasonal trends’, apart from shifting user growth where it actually generates less revenue per user. And at that base figure, the valuation would be about 33 times its ad revenue, in comparison to mere 5.5 times for Google. The apparent reason for this discrepancy is owing to the fact that the social site is still relatively a young company with much faster growth than the search giant, worth $200 billion with $36.5 billion in ad revenue over the last year.
Scale of Facebook’s advertising business
Facebook has built an impressive $3 billion-a-year advertising business by prompting marketers to purchase new forms of advertising smartly designed to generate buzz around their products, services and brands. Kia Motors has advertised on it since 2009. The automaker intends to push up its social ad spending. While creating brand awareness on a platform with 900 million users is obviously valuable, the company is not certain if a prospect actually sees an ad, and if that leads to a new car sale. The concerns from many other advertisers like Kia underscore the difficulties of tracking tangible results of social-media advertising.
Social-media advertising and ROI
Google and Yahoo offer traditional display plus search ads on their websites. Facebook offers image as well as text-based ads, too. However, it pushes new modes of advertising, which haven’t been tested fully. A case in point is its ‘Sponsored Stories’ feature launched some time last year that allows advertisers to rebroadcast positive posts of people on the website’s main news feed so as to highlight them.
As part of the arrangement, advertisers pay out a rate on basis of impressions, or views those posts receive. While they are able to track the return from ads on the former tow (Google and Yahoo) directly, Facebook mostly does not let in third-party surveys on its site or permit ads to be tagged with ‘cookies’ – a software to track what individuals do online after watching an ad.
However, a section of marketers feel that a simplistic calculation of monetary returns is not correct to judge success of Facebook ads. If a brand manager measures return on investment (ROI) as direct sales online, the social site may not be the obvious choice, but if the idea is to move the needle on specific brand health metrics, be it engagement or awareness, Facebook ough to be an integral part of your marketing mix, especially for consumer brands.
