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Facebook advertisingThere’s been a lot of chatter lately about the effectiveness of Facebook advertising, and most of it has been negative. Just days before Facebook’s IPO, General Motors cut its entire $10 million Facebook advertising budget, “deciding that paid ads on the site have little impact on consumers’ car purchases.” Shortly thereafter, Facebook went public, and the post-IPO drop in stock price was additional proof to many that Facebook’s ad-supported revenue model needed some work.

My take is simple: the cynics are right – Facebook’s advertising model needs lots of work. But the cynics are also short-sighted – Facebook will make advertising work for digital marketers, and soon.

A Lesson from Google: Negotiating CPMs

Way back in 2001, I was buying advertising on Google on behalf of FindLaw. Like today, the Google advertising product was called AdWords, and like today, the unit of currency was the keyword. Unlike today, however, every single ad buy had to be negotiated on a quarterly basis with an ad rep. Unlike today, ads were bought on a CPM basis, instead of a CPC basis. Unlike today, there was no Google Display Network, YouTube, product listing ads, site link extensions, API, AdWords Editor, tracking pixel, or even a user interface.

In other words, when Google started its advertising program, it sucked. It was manual, inefficient, and about as bare-bones as it gets. Imagine what AdWords would be like today if you had to literally negotiate with a human every time you wanted to buy ads (and then were locked in for a quarter!).

Like Google, Facebook actually started its ad program with a model whereby advertisers negotiated directly with sales reps. Like Google, it quickly migrated to an automated model, and like Google, Facebook has gradually introduced technology to make it easier for large advertisers to buy on Facebook at scale (examples include the Facebook advertising API and the recent launch of Facebook Exchange, or FBX). It’s been 12 years since Google launched advertising, and perhaps three or four since Facebook did the same. Like Google, the effectiveness, scale, and usability of Facebook advertising will increase year over year (Google’s self-serve AdWords model debuted around 2003).

A Lesson from Netflix: Plan for the Future, Not the Present

netflix logoA few years ago, I had a chance to hear Netflix CEO Reed Hastings speak. During the Q&A, someone asked him why it took Blockbuster too many years to counter Netflix’s model of video delivery, until it was basically too late. Hastings’ theory was simple: when Netflix launched, Blockbuster evaluated Netflix based on the company at the time of launch, not where it would be in the future. For example, when Netflix launched, they had a very limited selection of movies, didn’t get new releases for months, had no streaming service, and might need a week or more to deliver a movie to a customer. By comparison, Blockbuster always had the newest releases, and you could get one instantly by simply walking into a local store.

Flash forward to today, when Netflix has a better selection than Blockbuster, delivers movies in a day or two, has no late fees, and offers thousands of streaming movies. Meanwhile, Blockbuster has filed bankruptcy and is closing stores by the thousands. Had Blockbuster anticipated what Netflix would become, rather than evaluating it as it was at launch, the chain’s demise might have been avoidable.

To me, advertisers or agencies currently staying away from Facebook advertising are no different than Blockbuster. Facebook advertising will be a significant part of every online advertiser’s future budget – if you fail to invest in learning today, by the time you realize it is time to invest in Facebook, you will be way behind your competitors and it will be too late.

A Lesson from Lead Generation: Data is the Currency of Online Marketing

Many years ago, lead buyers (mortgage companies, for-profit schools, remodelers, etc.) bought leads solely based on one metric: cost per lead (CPL). If one lead seller could sell leads at a 25% lower CPL than another, that lead seller would get more interest from lead buyers. Over time, however, lead buyers realized that a lead is not a lead is not a lead. The true metric for success is whether that lead converts into a customer. Today, lead buyers use tools like Targus.info and eBureau to score leads to determine quality, and also use terms like “Cost per Funded Loan” and “Cost Per Enrollment” when paying out lead sellers. In other words, lead sellers with predictable, high-quality leads for sale get paid more per lead and get orders for more leads than lead sellers who bring in low-quality, low-converting leads.

When advertisers consider different online marketing channels, they basically use the same evaluation process, though the metrics used to determine success – things like ROAS, ROI, and even CPC – are slightly different. Channels with high-quality, predictable volume get more budget, and channels that cannot deliver consistently eventually fade away.

Facebook is in the early stages of aggregating an unprecedented amount of user data – both on and off Facebook – and this data should eventually enable advertisers to get returns on Facebook that meet or exceed most other marketing channels. Facebook has high-quality user demographics and psychographics (which are self-reported by users on Facebook and can also be gleaned from user behavior); Facebook knows who your friends are; Facebook knows what sites you are visiting on the Internet (Facebook Connect); and now Facebook Exchange will allow advertisers to merge cookie data from across the Internet with user behavior on Facebook.

While there are certainly privacy concerns that Facebook will have to navigate before all of this data can be stitched together and sold to advertisers, the eventual convergence of all of this user information will enable advertisers to create highly targeted, highly predictable campaigns at both the top and the bottom of the purchase funnel. Data enables smart advertising, and advertisers pay a lot of money when they have a degree of confidence that their campaigns will be ROI-positive.

Conclusion

Facebook advertising is in its very early days – to use the very clichéd baseball analogy, we’re talking about the 1st or 2nd inning here. Facebook advertising will get better and will become a major force in online marketing. As advertisers and agencies, this is the time to start testing Facebook and to start building a foundation of knowledge inside your company. The investment you make today will be paid back many times over in the next few years. Sticking your head in the sand – like Blockbuster or, dare I say, American auto companies like GM – may help you sleep easy today, but will set you up for failure in the future.

David Rodnitzky, CEO