This is a guest post by Mike Volpe, VP of Inbound Marketing at HubSpot.
I have been advertising on Facebook for a while, and have done a number of other forms of online advertising over the years. Currently, the big advantage Facebook has is the cost per click rates are still very low so you can get traffic at a lower cost than Google AdWords or many other sources. I have found that if you target the people and ads appropriately, you can get Facebook traffic to convert at about 2/3 the rate of AdWords, which given the much lower (5-7 times lower) cost per click, means the leads are still cheaper.
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This morning I listened to Jeremy Schoemaker’s interview with Tim Kendall. The interview provided a lot of great insight into the best practices for leveraging the Facebook advertising system which still remains in its infancy. Tim expressed their dedication to scaling the advertising platform but for the time being he emphasized how they are still in startup mode.
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Yesterday we reported on a Facebook screenshot that replaced the Advertising tab to read as the “Lying” tab. We initially thought the screen shot may have been a hoax because of the tab’s alignment, but later learned that the screen shot wasn’t altered. What we didn’t learn yesterday, however, is what Facebook had to say about it.

In the face of having a serious and ongoing issue with the public perception of its ad network, Facebook has revealed today that the word “Lying” appeared as a result of its language translation application, reports TechCrunch. This was, in fact, an English to English auto-translation that managed to allow the word lying to replace the advertising tab in certain regions.
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For the past few months Google has been filling ad inventory on Facebook applications and according to individuals on the team behind the ad sales, things have been going well. When Facebook launched their platform last year, a whole slew of new startups emerged around the social advertising space. Companies like SocialMedia, Cubics (later acquired by Adknowledge), AdParlor.com, Lookery, and others each fought for a piece of the social advertising pie. Small startups are rapidly finding that it’s not a good place to play though.
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Yesterday Seth Goldstein, CEO of SocialMedia posted an interesting note on Facebook about the paradox of social advertising. As you’ll see in his note, it is summed up with “This is the paradox of social advertising: unlimited inventory of impressions that users have come to ignore, but very limited inventory of commercial experiences that users are opting in to engage with.”

Nobody will deny that the industry faces some substantial hurdles and given SocialMedia’s leadership position in social advertising, they are positioned to know about the hurdles first-hand. Here is what Seth had to say:

With a global reach of over 200 million users and growing each day, social networks have become the new mass entertainment. This scale has become increasingly attractive to brands eager to reach a critical mass of consumers. And yet managing to balance scale and engagement has proven difficult. While it is easy enough to purchase vast amounts of social display inventory at less than $.25 CPM, you tend to get what you pay for: advertising which is universally disregarded as irrelevant if its not ignored entirely.

The social media user has evolved to become immune to the very ads that are supposed to subsidize his online experience.

• advertisers distract users ?
• users ignore advertisers ?
• advertisers distract better ?
• users ignore better ?

This vicious cycle threatens the emergence of a viable business model for the social media industry. There are trillions of display ads in the form of web banners that are being delivered to and ignored by consumers around the world. Internet advertising suffers as a result of the irrelevance of these ad units. And yet IAB-standard ads are the only units that have the web-wide scale required for large consumer brand marketers. Aside from taking over the front page of Yahoo! or MySpace (the web equivalent of advertising on the super bowl), a brand such as Coca Cola can’t afford- from an opportunity cost perspective- to do a handful of one-off campaigns featuring original content in non-traditional formats. While commercial applications and some new social ad formats provide deeper engagement, they rarely offer the scale that drew advertisers to social media to begin with.

This is the paradox of social advertising: unlimited inventory of impressions that users have come to ignore, but very limited inventory of commercial experiences that users are opting in to engage with.

There’s a pretty well known secret among top Facebook application developers: one developer is generating over $1 million a month. Who is that developer exactly? Well, most people won’t talk about it and after some prodding around we’ve narrowed down the suspects. We aren’t going to post them though because ultimately it doesn’t matter who the individual is. All that matters is that a top application that is used for entertainment purposes is generating over $1 million a month.

Facebook Apps As a Business

While it still doesn’t qualify the company as a large business, it does emphasize the potential for applications in this space. As an individual developer or a small team of developers, $1 million a month is pretty damn good and I’m sure a large portion of that is going straight to the bank. Who’s responsible for generating this revenue?

Well there is already multiple ad networks that are generating revenue for their developers, but some of them are going so far as to speak out about how much money is being generated. Offerpal (who is also a sponsor of and participant in our Social Ad Summit) has said that developers are generating around $75 per 1,000 active daily users on average and $150-$200 for more engaging applications.

How to Generate the Big Bucks

So are you looking to become the next Facebook application millionaire? Good luck! Generating $1 million a month is pretty challenging in the current environment but if you can come up with a creative application, you may have a chance. (fluff)Friends users for instance, are so passionate about the application, that some of them went so far as to participate in a (fluff)Friends video contest. Below are a couple of the top videos.

This application and a few others like Friends For Sale, Mob Wars and Owned, are all highly engaging applications. Each of them continues to attract users months after they were launched and the applications also continue to evolve. If you are looking to build up your revenue base, then you might want to mimic many of the strategies employed by these companies.

Have you hears of any other interesting rumors about application revenue being generated?

August 18th, 2008

Tim Kendall, Facebook’s Director of Monetization spoke at an app developer Meetup at AOL Mountain View. All Facebook covered the Social Ads panel and got a chance to catch up with Tim afterwards.

Tim Kendall

Tim’s team incubated Facebook Social Ads, and he oversees product development and product marketing for social advertsing on the Facebook platform.

Facebook Social Ads

Social advertising is a huge opportunity for Facebook and app developers. Facebook gives advertisers unprecedented reach, however, the platform is dominated by expressions of social intent - more so than commercial intent.

Facebook Social Ads is developing ways to segue users’ activities to more commercial actions, in a way that fits with the overall user experience of the platform. App developers are going to be able to participate, by having their applications accelerated by Facebook in partnership with paying advertisers.

Social advertising on Facebook is clearly experiencing rapid innovation and evolving dramatically.

Facebook Social Ads - Early Iterations:

Initially, the Social Ads program focused on leveraging the social graph to increase interest in an advertiser’s message. This increases performance relative to an advertisement that does not take advantage of knowledge of friend connections and information about those friends.

A classic example would be a campaign to promote a move that leveraged and communicated information about which of your friends watched or enjoyed a particular movie trailer.

Facebook Social Ads - Next Generation:

In the next 6-12 months, Facebook is developing the ability for advertisers to throttle usage and engagement in areas they care about. Marketers will be able to pay to accelerate usage they find valuabel, to dial up and down actions that people take on applications, as part of the Social Ads program. For instance, News Feed uses an algorthm to communicate a users actions to the friends who would find it most interesting. Marketers will be able to pay for increased or enhanced distribution above and beyond what News Feed already provides.

An example would be purchasing a ticket to a concert. Usually, a small subset of your friends would receive a notification of this action, however, in the future Cheryl Crow or Ticketmaster could pay fo r this to be distributed to your full friend group.

Summary

Tim and Facebook are clearly innovating rapidly in the Social Ads space, after defining the category initially. Facebook is exploring ways to make it completely transparent which actions are commercially accelerated on the platform, essentially in similar way to which Google color codes sponsored search links above its organic search results. Additionally, Facebook is focusing on how App Developers will be helped by this new form of monetization for their applications. Facebook will help app developers accelerate the distribution of their applications drive more usage with Facebook’s next generation of social advertising tools.

Will everyone accept how Facebook Social Ads affects the user experience (UX)?

Back at the end of January, a company that had technology that could morph faces together decided to launch an application. As expected, the application has done decently with close to 60,000 installs. Last week, the American Social Health Association sent out a press release announcing a formal partnership with the application team to spread awareness about STDs. The partnership provides a great example of a successful campaign on Facebook.

As soon as you morph two faces and send it, your friends will receive a copy of the image in addition to a notification that they have unfortunately received chlamydia. The goal is to spread awareness. Honestly, I think this is a great example of a smart partnership for getting the word out about an organization and a cause online. Frequently we see crappy ads on a number of Facebook applications. Instead, it’s frequently much better for brands to partner with those applications then to build their own.

There are a number of examples of this including some movie launches. That’s what the company Apps Savvy is focused on. They are working with large brands to help the expand their reach through existing applications on the Facebook platform. I’ll be interviewing Chris Cunningham, the founder of the company, later this week to discuss how brands are benefiting from such partnerships and what types of CPMs developers are seeing.

Getting your brand out on Facebook is extremely challenging. While larger media companies and large brands can frequently afford to build their own application and pay for an initial user base to install the application, most companies don’t have the luxury of a lot of free cash on hand. As such, making an investment in branded partnerships with applications can prove lucrative. Check out the video below to see how the Morph Monkey partnership worked for the American Social Health Association.

Yesterday there was a lot of discussion surrounding the CPMs that Facebook application developers are receiving via various ad networks. While I am working on my own project to more accurately monitor run rates on Facebook ad networks, for now, the sample provided by Justin Smith is sufficient enough to come to the following conclusion: why buy branded Facebook ads when you can launch an application yourself?

I had the opportunity to speak with Naval Ravikant of VentureHacks.com earlier today and he stated that as a whole, CPMs on social applications are going down because there is too much inventory. Chances are good that growth in inventory is going to continue to outstrip the growth in brand advertising. This is bad news for most application developers. So how do application developers make more money?

Well, one way is to hire a sales team but for individual developers this is typically unrealistic. So what are they to do? Well if you have enough targeted inventory, you might be able to get into Federated Media but you better have millions of page views on your application and your application must be something that brands will want to place their name on. Honestly the best option for developers is to get acquired and work with a larger development team.

Most developers can’t expect a million dollar pay out though because their application is going to have decreasing cash flows given the decreasing CPM scenario. Given that apps are basically annuities with decreasing cash flows, the sooner you sell, the better. So who are the people making money in the current environment? Companies with a substantial sales force that are doing direct brand outreach are the winners because they have their fair share of inventory to pick from to fill new branded applications.

So what should brands do? What they already are doing! Brands are creating engaging applications and driving users to their applications with cheap inventory. Do you see any better options for application developers?

An over the top ad campaign for the upcoming Universal Pictures produced “Untraceable” has been removed from Facebook after concerns were expressed about excessive violent content. I’m fortunate not to have seen the content because it sounds pretty gruesome. According to the Guardian, the agency had launched a Facebook page called “Kill With Me”. The more people that joined the page, the more gruesome the content.

The page included the following text: “”This guy is going to die. You want to see his stinking flesh burn and bleed and blacken? Until he’s some twisted dead thing? This is what you want. And I’ve filmed it especially for you. The more fans I get, the more I’ll show …” An equally controversial campaign was posted on Seesmic which included a series of videos ending in the users being tortured and murdered. A community moderator ended up calling police after failing to be notified of the campaign.

According to one of the agency representatives “There’s that interesting question of whether people are desensitised to things on screen … They will watch these things, but won’t say they watched them.” I’m not sure what they were going for but the campaign has since been pulled. They frequently say that all press is good press but this over the top campaign was truly a test of that theory. Imagine if you stumbled upon someone being murdered while browsing through Seesmic. It would have a serious emotional impact.