(CNN) -- Every post you "like." Every friend you add
or fan page you join. Every place you check in, and every Web page you
recommend.
To you, those are ways to
enjoy, expand and improve your experience on Facebook. To Facebook,
they're the building blocks of a multibillion-dollar company.
In business, there's a
well-worn line that could apply to the social-networking behemoth: If
you're not paying for it, you're not the customer. You're the product.
In this case, you're a product worth, to Facebook, an average $4.84 a year.
As Facebook hits Wall Street this week with
a public stock offering that could value the company at more than $100
billion, investors appear dazzled by the company's uncanny ability to put the right advertisements in front of its roughly 900 million users.
"The unique thing about
these guys is the accuracy with which they can help advertisers and
marketers understand who they're getting," said Arvind Bhatia, an
analyst with Sterne Agee Financial Services. "On Facebook, your
information is authentic; they are able to basically make the ads, and
your experience, more relevant. I think that is unique. It's
unprecedented and the reach is unparalleled."
In documents filed in
relation to its stock offering, Facebook says that about 85% of its
revenue comes from advertising. The other 15% comes from payments made
within apps that run on the site (a head-turning 12% is from a single
source -- Zynga, makers of social games such as "FarmVille.")
As Bhatia suggests,
Facebook's unprecedented advertising advantage is built upon the service
it provides. As users interact with the site, they gradually build a
fuller and fuller picture of themselves. That, in turn, lets Facebook
sell advertisers on its ability to put their product in front of the
people most likely to be interested.
How targeted ads work
For example, say a woman
who has listed her hometown as New Orleans changes her relationship
status from "single" to "engaged." Facebook suddenly has a hot prospect
to offer up to a bridal retailer or caterer in the Big Easy. To dig
deeper, if she lists her MBA from Loyola and has "liked" pages for, say,
Saks Fifth Avenue and Mercedes Benz, you get a fuller picture of how
much she might be willing to spend.
"With a reported 901
million members, Facebook is a great test bed for understanding
consumers and their purchasing interests," said Jan Rezab, CEO of
Socialbakers, a social-media analytics firm. "Before Facebook, marketers
relied on online surveys or focus groups to determine customer
interest. Now, they can reach the customer directly on their Facebook
page."
Facebook doesn't publicly give away the details of how its system works. But as it has begun wooing potential investors, the company has been more willing to talk about its advertising approach.
Dan Rose, Facebook vice president of partnerships and platform marketing, discussed the appeal of its social ads at an event recently in Austin, Texas.
The average Facebook user has 245 friends. When
that user likes a product or company's ad, it serves as an endorsement
to those friends from someone they know and, presumably, trust.
"When I raise my hand
and say, I like Einstein (Bros.) bagels, and then one of my friends sees
that ad, they're going to see my name in that ad," Rose said. Through
Facebook's partnership with the media-research firm Nielsen, "We found
that when my friend's name is in an ad, I'm over 60% more likely to
remember the ad, and I'm over four times more likely to purchase the
product," he said.
"This is word of mouth.
This is word of mouth at scale. This is what, as marketers, we've always
been trying to bottle up and find a way to take advantage of. And the
social Web is finally allowing us to do that."
In his 2010 book, "The
Facebook Effect," David Kirkpatrick recounts chief operating officer
Sheryl Sandberg's arrival in 2008, when she sharpened the company's
focus on what would become the current advertising model. CEO Mark
Zuckerberg, meanwhile, remained focused on growing the site and
improving user experience -- a focus he reportedly maintains to this
day.
Kirkpatrick writes of the level of detail a Facebook ad can reach:
"Anybody can pick
through endless combinations on Facebook's self-service ad page," he
wrote, referring to the tool advertisers use to target their ads. "You
can show your ad only to married women aged 35 and up who live in
northern Ohio. Or display an ad only to employees of one company in a
certain city on a certain day. (Employers aiming to cherry-pick people
from a competitor do this all the time).
Customers for Facebook's more expensive engagement ads can select from
even more detailed choices -- women who are parents, talk about diapers,
listen to Coldplay and live in cities, for example."
In its Wall Street
filing, Facebook listed its Average Revenue Per User at $1.21 per
quarter, or $4.84 a year. That's less than rivals like Google and Yahoo
and miniscule compared to companies with more traditional business
models, like wireless providers and cable companies.
But, as Rose says, it's all about scale for a company that will likely reach 1 billion user accounts by the end of the year.
User data and privacy
Not that the model
hasn't made some folks antsy. Time and again, tweaks to Facebook's
privacy settings have prompted user backlash, occasionally to the point
that the site has reversed or modified those changes.
According to a recent Associated Press/CNBC poll,
three out of five users say they have little or no faith that the
company will protect their personal information. Half of those who use
the site daily say they wouldn't make a purchase through it and 57% of
all users claimed they never click on ads or other sponsored content.
On a page about its
advertising approach, Facebook makes it clear that it never sells user
data, saying that "if you don't feel like you're in control of who sees
what you share, you probably won't use Facebook as much, and you'll
share less with your friends."
Facebook officials also
emphasize that while advertisers can market to specific users, they
don't receive the data that was used to make the selection and never
know the actual names of the people they've reached. Facebook's policy
is to not actually look at user data except to check whether someone is
violating the site's terms of service.
Doubling down on user
satisfaction is the most important thing Facebook can do, Bhatia said,
even if it occasionally means passing up chances to max out the amount
it could earn on the data users provide.
"For them, the user
experience does come first and I think that's the right strategy for the
long term," he said. "Along the way, putting the user experience first
makes a lot of longer-term business sense."
As an analyst, Bhatia is
bullish on Facebook, leading the pack with an early "buy" rating at the
beginning of this month. With Facebook reportedly looking at expanding
into China and at monetizing its mobile app (an untapped resource even
though the majority of time on the site is now spent on mobile devices)
he expects its data-driven model to keep making money well into the
future.
"Facebook is going to
become just like search, [which] disrupted online advertising," he said.
"What Google did eight years ago -- that is what Facebook is doing now.
The reach is unparalleled and they're just scratching the surface."
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