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.