Every week, a couple of hedge funds ask me to project Facebook’s revenue curve and outline what factors are affecting it. They want to know whether sponsored stories are gaining traction, why big brands are spending only sporadically on ads, and what the holes are in the ads’ products.
I charge them $400 for 30 minutes or $500 for an hour. Let me summarize what I’ve been saying to them…
Facebook can’t grow its ad revenues just by hiring more salespeople. Most folks have tried Facebook and aren’t sure if they’re successful or are disappointed. If you crash your brand new helicopter, for which there was no manual, whose fault is it?
Facebook’s ad platform changes so fast that even most pros don’t know how to use it. Massive kudos to Facebook for a sophisticated product and even solid agency training programs here (it’s free, but you have to get approved). But this leaves most folks in the dark– hounded by sales teams fresh out of college who don’t know marketing strategy.
To be fair, most online marketers are still in the dark about Google AdWords, thinking that it’s still about keywords and text ads. Google has been in the game a lot longer. And the offer of personal support on new accounts that spend at least $1,500 a month is alluring.
Training is key, and they’re ramping up. Big brands want to know how to build and justify a social budget using metrics that a CFO would appreciate. To the dismay of eager sales folks, merely spending more than last year or spending because there a billion people on the platform are insufficient reasons. Buying more tools is just as bad since generating charts and posting more content equates to a noise-making strategy, not one based on ROI.
$1.6 billion in Q3 revenues isn’t bad, but I’ll bet they can raise average CPMs from 30 cents to well over a dollar in the next 18 months and perhaps $3 in 3 years. This is like the early days of AdWords, where every click was a nickel. Even today, I can get Facebook search traffic at pennies a click (just type in “pubcon” and see the suggested results as you type). And targeting by workplace (they work at Facebook) or interest (they like PubCon) is the same price as males 18+. Thus…
A 10X increase in traffic costs is not unthinkable, so if you’re not getting ROI now at these prices, you’re not likely to win when prices go up. Those who complain of poor performance usually suffer from low CTR, which is a result of imprecise targeting and non-social ads. The average CTR of 0.030% by the major Facebook ad players can easily lead to a dollar CPC in the US. The fact that traffic prices have increased is often more a factor of targeting that is too broad. Newsfeed ads routinely are over 2% CTR, while mobile ads can be 12.5%. Those who complain of rising costs think they’re slamming Facebook when really they’re not taking advantage of all the new ad units available– there are over a dozen.
Rapid death and birth of products. Gifts, Reach Generator, premium ads, open graph protocol, and a variety of other initiatives have died or are likely to die. But FBX (retargeting onto Facebook), offers (which now require ads), and Sponsored Posts (from the timeline directly) will be solid revenue drivers. Are you using them yet?
Facebook apps continue to be commoditized. If you’re a developer of Facebook ads/pages/insights, you better have a clear acquisition play or be developing something well beyond the base list of requirements. Unlike the apps platform (Facebook is not interested in building games to compete with the Zyngas of the world)