Facebook’s ad strategy: Analysts weigh in
By Hayley Tsukayama,
With over one billion users, Facebook is officially more than three times the size of the United States population. Despite its long reach, one question has plagued the company and its new investors: Why can’t they make more money off that huge pool of users?
Earlier this week, it made its most aggressive pitch yet directly to some of its users: buy better placement for your most important posts for $7 each.
That may have a limited appeal, analysts said, though they said it likely means the company is moving in the right direction.
In its latest push, the company introduced a feature that allows U.S. users with fewer than 5,000 friends to promote their updates — for a fee. The users’ posts would gain prime placement on their friends news feeds.
Testing promoted posts is a can’t-lose situation for Facebook, said Motley Fool analyst Joe Magyer.
“I think it’s a great way to tap into the huge base of users they have,” he said. “It’s a zero-cost test for Facebook to monetize a billion monthly users who aren’t paying them very much money right now. There’s no downside to testing it for Facebook, and some users might hop on and love it.”
The promoted posts may be a way for Facebook to catch up with competitors like LinkedIn, which generate a lot of monetary value from each user, said Magyer.
“What impresses me about LinkedIn is how much money they’re wringing out of each user they have, especially when you think about how much more time you spend on Facebook,” he said.
Asking users to advertise may not be the right focus for Facebook, said Nate Elliot, an analyst for Forrester Research. There’s nothing wrong with promoted posts as a concept, he said, noting that sponsored updates for businesses have already proven effective. But he said Facebook also needs to focus on different aspects of its network, such as the business pages that could help marketers increase engagement with their fans.
“Facebook is playing catch-up with the rest of the online ad industry,” said Elliot. “But that’s not the promise that Facebook holds.”
Facebook declined to comment on its ad strategy.
Meanwhile, other companies are stepping up their efforts to marketers. Google is expected to pass Facebook in display advertising revenue for the first time ever this year, according to research from the advertising analysis firm eMarketer.
“The nice thing about Google is that when you search for a product you’re quickly brought to the point of sale,” Magyer said. “Facebook is in a different portal. You’re not looking to buy. So an ad that comes up is a little random and not as targeted as if you were explicitly searching.”
Showing users more relevant ads — whether from friends or from companies — he said, is crucial to Facebook’s continued survival.
“The real risk is that by pumping Facebook full of ads you’ll run off users,” Magyer said. “People will get tired of having screen jammed full of ads, especially if they’re not relevant.”
(Washington Post Co. Chairman and Chief Executive Don Graham is a member of Facebook’s board of directors.)