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

10 Comments

  1. rodnitzky June 18th, 2012

    Why You Should Care about Facebook Advertising: Lessons from Google, Netflix, and Online Lead… http://t.co/FQum4fAp

  2. David Rodnitzky June 18th, 2012

    Why Facebook advertising matters, written by yours truly.

  3. Chris Zaharias June 18th, 2012

    PPC Associates CEO David Rodnitzky explains why getting good at Facebook advertising now – not later, now – is essential for advertisers.

  4. David Rodnitzky June 19th, 2012

    Thanks Chris!

  5. Ellen Keri Goldberg June 19th, 2012

    I think this has some gaps. For one thing Blockbuster didn't just face competition from Netflix, they also failed to consider the challenge from things like Redbox. A lot of people who just want to see the big films don't really like Netflix because, well, because it's not Blockbuster. But people can have a similar experience with Redbox except without having to deal with a giant store. Blockbuster didn't fail because they didn't see the challenge from Netflix, they lacked inventiveness. And the truth is they would have had to change their entire biz model to keep up meaning they still would have wound up closing all those stores and clearing house.

    I think the thing with Facebook is to understand that it's more like traditional advertising than online advertising. You aren't so much going to get the chance to convert as you are to let people know about your products or service and that they exist. People don't go on FB to buy, they go there to share information and certainly advertising part of the sharing. GM probably doesn't need to use FB for this purpose (except maybe for new car models). And sure FB will introduce improvements but it's really not that difficult nor do you really fall that far behind if you wait to see a better ad product. Otherwise, why would FB even need to bother improving? I think it's a good idea to keep tabs on what FB is doing, but if you don't have the budget to support something that isn't working for you, then you should spend your money in places that do.

  6. David Rodnitzky June 19th, 2012

    Ellen, thanks for the comment. I do agree that FB is currently more like traditional "top of funnel" advertising, but I think that will change and its worth keeping tabs on it because when it does, those who understand the FB ecosystem will reap a windfall!

  7. RaquelHirsch June 19th, 2012

    Why You Should Care about Facebook Advertising: Lessons from Google, Netflix, and Online Lead Generation http://t.co/Iqsqvmd1

  8. Alon Matas June 19th, 2012

    David, you had an epic post a few years ago about the advertising platforms of Microsoft and Yahoo (which still had the infamous Panama) where you gave them the simple advice of "copy Google". I wish Facebook had listened to this advice as well. Now, I know it's a different kind of platform (search-based vs. social-based) but I still don't get how so many things that became trivial in AdWords (and even in Panama RIP!) weren't implemented yet in Facebook.
    Yes, Google had 12 years and FB only had 4 but Google was a pioneer and FB could have learned a lot. And yet, FB self-serve system is amateurish and very difficult to optimize with.

  9. mk_adriana June 19th, 2012

    Why You Should Care about Facebook Advertising: Lessons from Google, Netflix, and Online Lead Generation | PPC Associa… http://t.co/IxSUjLBj

  10. cwolfard June 21st, 2012

    Why You Should Care about Facebook Advertising: Lessons from Google, Netflix, and Online Lead Gen | PPC Associates Blog http://t.co/YOevjxdr

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David Rodnitzky
David Rodnitzky is founder and CEO of 3Q Digital (formerly PPC Associates), a position he has held since the Company's inception in 2008. Prior to 3Q Digital, he held senior marketing roles at several Internet companies, including Rentals.com (2000-2001), FindLaw (2001-2004), Adteractive (2004-2006), and Mercantila (2007-2008). David currently serves on advisory boards for several companies, including Marin Software, MediaBoost, Mediacause, and a stealth travel start-up. David is a regular speaker at major digital marketing conferences and has contributed to numerous influential publications, including Venture Capital Journal, CNN Radio, Newsweek, Advertising Age, and NPR's Marketplace. David has a B.A. with honors from the University of Chicago and a J.D. with honors from the University of Iowa. In his spare time, David enjoys salmon fishing, hiking, spending time with his family, and watching the Iowa Hawkeyes, not necessarily in that order.