The Business of Facebook 

“What is the business we are in?” was one of the first and perhaps the most important question Sheryl Sandberg asked when she joined Facebook. After weeks of endless meetings the firm understood they were in the business of advertising. Now that the Facebook has attracted all spotlights with its high P/E-multiple IPO and sinking stock price, the next question has evolved as “do Facebook ads work?” Time Magazine’s Business section recently published an article exploring this question.

According to Andrew Lipsman, VP of Industry Analysis at comScore, and co-author of the recent study, “The Power of Like: How Social Marketing Works”, Facebook ads can work. He claims that “Facebook ads can absolutely drive advertising effectiveness” but it seems like more data points are needed to make any conclusion. He adds that “this process will play out over the next couple of years.”

An early validation of Lipsman’s argument is available in the study. Based on the results, the study showed 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”. In addition, the study concluded 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”.

Who are these Friends of Fans? Perhaps, it is the right moment to take a step back and discuss the different marketing types on Facebook:

-          Paid media: Paid media is used by Brands to display their ads on the Facebook platform to attract Fans to the Brand Page

-          Owned media: The Brand Page is the owned media “which serves as a platform for marketing communications” that reach the Fans and Friends of Fans.

-          Earned media: The media displayed to the friends of Fans is considered as the earned media since friends listen to their friends posts in the News Feed and other part of the Facebook platform.

What are the right metrics to measure the success of these different types of media environments? CTR (click-thru-rate) might not be the best choice since earned media is usually similar to display ads. Is CPM a better measure? I think marketing industry needs to come up with new measures to understand the role of Facebook ads. As Sam Gustin mentioned in this article, “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.” How do we capture this amplification effect? This is measuring the change in human behavior. Perhaps, it might be one way to quantify the success of Facebook.

Source: Do Facebook Ads Work? By Sam Gustin, Time Business, August 7, 2012