How Facebook Tricked Brands Into Giving Them Billions of Dollars

Budgets on the social media giant need to be better managed

blue background; in the middle is a collection box with the facebook logo on it; hands are pouring gold coins into the box
Facebook was able to position itself as a necessity in marketing. Photo Illustration: Trent Joaquin, Sources: Getty Images
Headshot of Alex Lirtsman

Despite Facebook’s recent controversies, ad sales have continued to grow. In fact, Facebook netted nearly $40 billion in ad revenue last year because brands believe the platform is driving significant sales. But smart marketers and agencies have been in on a secret for years: The actual sales revenue advertisers generate from Facebook ads is much smaller than what Facebook or their agencies reports back to them.

If a brand’s ultimate goal is revenue, then it’s critical we optimize toward actual incremental revenue and not let Facebook take tens of billions of dollars’ worth of credit for existing or inevitable sales. The question that must be asked isn’t whether or not Facebook is driving sales, but rather how much of that revenue is incremental.

How Facebook did it

Facebook used a few maneuvers to get brands on board. They made sales an objective that brands could optimize, a decision that let marketers target a much more appealing metric and helped Facebook exponentially scale their ad business. They also took advantage of view-through reporting, instances when Facebook gets credit for a sale just by displaying an ad. However, view-throughs don’t acknowledge that customers typically see multiple ads prior to purchase and that one additional exposure has marginal impact on a consumer’s ultimate purchase decision.

By building the narrative that ad views without user intent leads directly to sales, Facebook has been able to drive ad spend and expand its value.

Lastly, Facebook prioritized advertising to existing customers. Acquiring new customers costs five to 25 times more than selling to existing ones, meaning there’s little incentive for brands and agencies to drive incremental sales when they can take home a profitable reporting win that requires much less work. By building the narrative that ad views without user intent leads directly to sales, Facebook has been able to drive ad spend and expand its value. Marketing managers see ROI shooting through the roof and increase spend, causing everyone to celebrate this seemingly stellar performance.

Time and time again, we see brands misallocate their budgets and focus on strategies that drive the most reported sales versus incremental ones. In reality, a Facebook ad is a singular touchpoint on a prospect’s journey to purchase. One exposure to an ad, no matter the platform, is not typically enough to drive a sale. As a result, Facebook maximizes its revenue by showing less ads to the right users while minimizing that of advertisers.

What marketers need to watch for

For the typical client, Facebook claims a return on ad spend that is on average four times higher than what they actually deliver when tested against a control group. This embellishment began when Facebook pivoted from being an upper-funnel channel, driving vanity likes, to positioning itself as a bottom-funnel channel, driving conversions.

To complicate matters, most advertisers and agencies don’t break out view-through from click-through conversions in reports, so brands have no reason to think anything is amiss. But many who work in marketing and advertising know that those conversions are an inflated metric and that most retargeting simply looks for existing customers.

Frankly, this is why we should have been skeptical of Facebook’s shift and questioned why it should be treated differently than display, a channel where impressions and reach, rather than conversions, are the primary performance indicators.

Reframing the conversation

At best, Facebook’s reporting embellishment is misleading. But this is not to say that everyone should pull their ad dollars from Facebook—far from it. Rather, companies need to approach Facebook advertising the same way they do display ads, TV commercials and physical billboards as essential parts of their entire purchase journey.

How? Brands can start by optimizing to the right KPIs in a person’s journey or by adopting attribution models that take a prospect’s behavior into account, such as the average number of touchpoints between exposure and conversion.

Hold-out groups and PSA tests are another smart investment. In fact, Facebook has been rolling out Conversion Lift Studies to help marketers measure the incremental impact of their Facebook ads. This isn’t out of the box yet, but it’s definitely a step in the right direction.

There are numerous ways to better optimize Facebook budgets. In the immediate, brands need to start viewing Facebook ad spend with both eyes open and avoid being seduced by inflated conversion metrics.

Alex Lirtsman is the founding partner and chief strategist of Ready Set Rocket.