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This morning I was reading a Forbes article in which the author, Taylor Buley, does some flawed math to figure out the ridiculous number of ads Facebook would have to display to generate $100 million. Taylor makes a solid point, with extremely low click through rates Facebook needs to attract tons of impressions to generate a substantial profit. Thankfully Facebook has billions of monthly impressions and that number continues to grow.
Taylor’s article reminds me of a recent article by Time magazine titled, “Facebook Takes a Dive: Why Social Networks Are Bad Businesses” in which the author states “The reason that social networks will never do well financially is that they break from the successful model that has brought so many marketers to the internet.” It’s really easy to dismiss a company that’s not making a substantial profit.
Just take a look at a Business Week article from December, 2000 in which the author questions Google’s business model:
But how will Google ever make money? There’s the rub. The company’s adamant refusal to use banner or other graphical ads eliminates what is the most lucrative income stream for rival search engines. Although Google does have other revenue sources, such as licensing and text-based advertisements, the privately held company’s business remains limited compared with its competitors’.
As the article points out, Adwords wasn’t generating a substantial portion of Google’s revenue at the time:
The company has also instituted a pay-for-play scheme called Adwords that allows an advertiser to purchase a word and place a small text ad on the page whenever that word is mentioned in a query. But Google is making the most money from customized intrasite search functions, built for a dozen select clients, such as router giant Cisco Systems and Linux provider Red Hat.
We all know where that business ended up. So yes, Facebook hasn’t yet generated a “substantial profit” by internet standards but they definitely have a model that works and advertisers are just beginning to take note. A couple weeks ago I paid for an ad which targeted one individual and it generated a CPM of over 34 dollars (as pictured below). At one point the CPM was around $90 until I let the ad continue running after the person had clicked the ad.
Granted, the average Facebook advertiser is never going to get down to the level where they are targeting a single individual, but anytime that an advertiser can pay less to advertise to their target market, they will. That’s why the average CPMs on Facebook will rise over time and that’s why you should take advantage of Facebook’s considerably low cost per click rates. The ad rates are only getting more expensive not cheaper.
Don’t think that advertisers will bite? Give it a few more months and you will be saturated with ads that are specifically targeted to you based on your profile data. Over the past few weeks there has been a surge in advertisements based on users’ musical interests. I have personally seen tons of them. Right now we are seeing advertisers educate themselves on how to leverage Facebook ads but I would argue that soon enough Facebook ads will be ubiquitous among advertisers.
Why am I so confident that advertisers will race to Facebook ads? While I won’t share with you all the ads that I’ve run, I’m personally receiving an immense value out of the ad network. When was the last time you could target people at a specific company for $0.15 a click? The bottom line is that the Facebook ad system is still extremely early and quickly dismissing it doesn’t take any effort.
I can just about guarantee you that Taylor Buley of Forbes hasn’t invested a substantial amount on Facebook ads. I don’t need to convince Taylor or anybody else of the value presented by Facebook ads though because I’m the one reaping the benefit of cheap CPMs and cheap CPCs.
Ha ha. You targeted an individual? Do you do that by getting unbelievably specific with their interests or what? I think there could be some fun to be had with that idea.
Your quotes about google being a failure make a nice point as well.
I pay $0.08 per click
I fail to see how knowing my interests woud cause me to CLICK or better BUY something?
Yea I like those movies, yes I joined all those groups, yes I have that car, yes I like doing that sport. But NO I would never be interested in ads about these things.
I never bought anything because I clicked an ad. (sometimes you are just curious and you click).
It would actually save you money not to show me any ads!
Since you ain’t gonna get a cent from me through it anyway.
we pay a $0.11 CPC
Thanks for holding accountable Business Week. Few go back to look up forecasts from the past. I think we would find most to be flawed. Writing forecasts makes for cheap, easy journalism that spreads quickly and is forgotten.
There are tons of articles these days about advertising on the net being dead. It’s changing is all and on top of this we’re in a recession. Facebook and it’s ads are here to stay and will for many of us be the benchmark going forward on how to make more money online.
For all of us that have applications or web sites we in a way have to thank big guys like Google and FB, they will create new models for advertising that we’ll all use in our own efforts.
Good article and yes the comment about Google is so true, FB will be the similar in due time.
Yup. the CPC are going to shoot when Facebook brings in volume via their own social ad network. Its just a matter of time they will start their own adsense leveraging their cookie data…
I recently did a campaign on my FB app for $20 CPM. Targeting is best done through apps.
Nick, this is the best article I’ve read on FB in a long time. I’ve been meaning to write a response to the ridiculous article from (of all potential ironic sources) Time Magazine. Thanks for beating me to it. Based upon comments, people still don’t get the fan acquistion model we preach 24/7 - but they will, eventually.
I wouldn’t pay more than $0.05 or a CPA deal. Comparing Google and Facebook might make a nice editorial point but it’s obviously a comparison between apples and oranges. Brands should become part of FB to enhance the conversation, not to disrupt it.
I couldn’t agree more with you. Time’s piece was total crap. I feel that because there was so much hype for Facebook over the past 18 months, the media is looking for ways to bring them down. Too bad their arguments are pretty weak. The fact is that both MySpace and Facebook get a ton of page views and have great user engagement. They could mkae more money but they don’t due to a tough economy and some missteps. But to say that they are horrible businesses is just plain wrong.
This post inspired me to write my own thoughts down here: http://loo.me/2009/04/07/i-dont-agree-with-the-hog-pile-on-facebook/
great!!!
try to focus on getting leads not sales
Maybe Google and Facebook have already peaked
I love the fact that you ran an ad targeting one person. You may have stumbled upon the lastest pick-up line.
whenever someone tells me “they have no concrete business model, they’ll never be successful or make money”…all i say is “GOOGLE”
I somehow paid .50 per click in the beginning, as facebook suggested that it was the standard amount, until I asked around and people were paying .03 or .11 as others posted.
I personally advertise on a dozen websites (mostly big blogs), and facebook is actually the lowest in getting conversions.
Good thing I used that Visa Business Network $100 free advertising coupon!
We’ve extensively tested buying Facebook ads for our clients, and we have certainly found that the CPM rates are quite low due to very low clickthrough rates on average. However, the amount of inventory is mind-boggling when you consider the amount of time that users spend on Facebook (upwards of 3 hours per month on average for each of the millions of monthly unique visitors). we at CPM Advisors strongly believe it is a good media option for our clients and we will continue to use it as such.