How Does Facebook Make Money?

If you’ve logged into your Facebook recently you may have noticed a feature box above your news feed. If you’re as adventurous as I am, upon your inquisitive click, you were soon face to face with an Indian girl who is much smarter than you. In a very simple video, she introduced Facebook Ads to the world.

Even if you’re not a friend of Facebook, you’re well aware of it’s dominance in the “social marketplace.” What you may not have realized however is just how profitable of a company it has become. If you need some proof – look at Facebook’s recent valuation of over $100 Billion. Not too shabby for a company that is less than 10 years old.

Facebook could easily go on not-so-secretly making millions (more like kajillions) through their advertising and the 800 million users would be perfectly happy looking at friends pictures while not being bombarded with unattractive ads. But keeping the status quo would put a wrench in Mark Zuckerberg’s plan to rule the world.

Zuck If You Buck

I’ve always  been a fan of Facebook’s advertising. While most online advertisers assume who is visiting a certain site or viewing a certain page, Facebook knows for sure. With each of the 800 million users creating a personal profile, it removes all guessing as to who the audience is. If I have a clothing company that sells graphic tees that only teenagers in the 90′s would find appealing, I can target that specific group. Facebook allows you to choose exactly who sees your ad. It’s an extremely efficient system in the eyes of the business owner.

Facebook generally has a lower clickthrough rate (CTR) for advertisements than most major Web sites. According to BusinessWeek.com, banner advertisements on Facebook have generally received one-fifth the number of clicks compared to those on the Web as a whole,^[69] although specific comparisons can reveal a much larger disparity. For example, while Google users click on the first advertisement for search results an average of 8% of the time (80,000 clicks for every one million searches),^[70] Facebook’s users click on advertisements an average of 0.04% of the time (400 clicks for every one million pages).^[71]

Sarah Smith, who was Facebook’s Online Sales Operations Manager, reports that successful advertising campaigns on the site can have clickthrough rates as low as 0.05% to 0.04%, and that CTR for ads tend to fall within two weeks.^[72] By comparison, the CTR for competing social network MySpace is about 0.1%, about 2.5 times better than Facebook’s rate but still low compared to many other Web sites. According to BizReport.com, Facebook’s low CTR is because Facebook users are more technologically savvy and therefore use ad blocking software to hide advertisements, users are younger and therefore better at ignoring advertising messages, users spend their time communicating with friends and therefore have their attention diverted away from advertisements.^[73]

On pages for brands and products, however, some companies have reported CTR as high as 6.49% for Wall posts.^[74] Involver, a social marketing platform, announced in July 2008 that it managed to attain a CTR of 0.7% on Facebook (over 10 times the typical CTR for Facebook ad campaigns) for its first client,Serena Software, managing to convert 1.1 million views into 8,000 visitors to their Web site.^[75] A study found that, for video advertisements on Facebook, over 40% of users who viewed the videos viewed the entire video, while the industry average was 25% for in-banner video ads.

Thanks to Wiki for this excerpt.

What’s Changing?

Facebook seems to be bringing transparency into their advertising – which I’m all for. If somebody is going to make money off of me, I would at least like the courteousness of knowing how. The social media site is basically saying “Listen, we have big plans for our site. In order to make these things happen and improve your experience, we need to hire top talent. In order to hire top talent, we’ll need to generate more income. In order to increase revenue, we’re going to expose you to some ads.”

The ads will be relevant to you and your interests. If you don’t like an ad, you have the option to delete it. I think the process will constantly improve over time, as users continue to divulge more personal information – and the ads will continue to be more useful.

How do you feel about ads possibly popping up in your news feed?

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