When Facebook sells an ad for a wedding dress, it charges $75. Google charges $1. What’s the difference? Why is it relevant for the future of advertising? Who are the players in this brave new world? And what are the implications in the long term? There is a transformation at play here, but Facebook’s recent IPO and stock price show the investor community has not quite grasped it. Here’s my understanding of some of the fundamentals, and my educated guess about future directions.
When you type in ‘wedding dress’ in a search engine, your interest in the dress can vary, and you might or might not be a potential buyer. For this information a company like Google charges the advertiser of wedding dresses $1. When you plan a wedding these days, you do this through Facebook. Your organize an event, you add the wedding date, the venue and send out invitations to your friends and family on Facebook. Those friends accept or decline. Facebook has profiles on all of those people (wedding organizers and attendees), their likes and dislikes, and with some smart profiling they know in which income category the wedding attendees reside. This valuable profile information Facebook sells to a wedding dress advertiser for $75.
Is it worth the $75? I would argue it is, because compared to the relevant information you derive from any other medium, Facebook is king of the hill. No other medium, from Yellow Pages, billboard advertising to radio and classified ads will give you such good insight into customers’ behavior and intentions to buy stuff. But is there a catch? Not many people remember that the TV format ‘soap opera’ was invented by soap manufacturer Procter & Gamble. They created the format specific for the audience of housewives to insert washing powder commercials, hence the name ‘soap opera’. So just like P&G created soap operas to segment and target their potential customers and refreshed the content to keep attracting housewives, Facebook needs to ensure that its users stay active on its platform and motivate them to share information that is relevant to advertisers.
Since social media is here to stay, Facebook does not run the risk of people giving up sharing relevant information. Just look at the amount of parties, gatherings and events (weddings and others) organized on it. Probably the only risk they run is that a younger generation will migrate to a new, cooler social media platform. But for the moment Facebook is the only outfit that has critical mass (and $16 billion in fresh capital to invest), so as long as they keep their eyes on the ball, they should remain king of the hill.
And what about advertisers? Advertisers are still adapting to the new reality of Facebook, just like they did when television became the dominant medium in the previous century. The first commercials on television were static newspaper ads with a voiceover. That changed. Now any self-respecting car and sneaker company has a Facebook page, but they do not really leverage the power of Facebook (yet). It is still like television advertising, but on a Facebook page. Here a new generation of smart marketers will understand the essence of profiling on Facebook and leverage this to attract users to share information that is relevant for advertisers. Amazon is probably most advanced in these profiling techniques, but I believe it needs new creative thinking; how to ensure smart profiling from Facebook data and use this to sell goods and services.
And the users, what’s their interest? There is a trade-off here. Using social media and sharing information is free, so as a user you have the choice to share information, and as trade-off, social media platforms generate revenue by monetizing this information. Since nobody forces users to share information, the trade-off is balanced. Most people would welcome targeted ads, if it benefits them. So the conclusion is social media, just like soap operas, are here to stay and advertisers who adapt smart to them will be the beneficiaries. And for the users, ‘if the product is free, then you are the product’, is not such a bad concept. Fruit exists as attraction for animals to eat and then defecate the seeds so the plant can reproduce and grow. Nature’s sophistication is still unmatched.