Modeling Value in the Facebook Advertising Channel

Social Media Ecosystem

Social media has a very complex ecosystem

Summary: Brand owners in both large and small ticket items face challenges quantifying the Facebook effect.  We profile 2 advertisers with a large new and old media presence and compare the Facebook fan base across these mediums. 

Since our last post, which was Pre Facebook IPO, we’ve seen the company come public and the stock get hammered with losses of 18% in the second two days of trading. The means by which the company came public and the information available has come under scrutiny and lawsuits are beginning to fly.

In that post, we asked several questions including: Can a free only (not Freemium like LinkedIn) sustain the business? Can Facebook improve advertising effectiveness (Major Advertisers are publicly abandoning the platform)? This week we’ll tackle these two topics as they are somewhat linked.

Can Facebook improve advertising effectiveness?

In the WSJ article, GM decided to pull Facebook ads due to concerns about effectiveness. GM was spending $10M on the ads and $30M creating content for Facebook. Many people have speculated that the reason GM pulled the ads was because it is really complicated to decide how to engage the space and what service providers to use.

Social Media Ecosystem

While this is certainly true and may have impacted GM’s decision, it is important to note that GM did not say it was ceasing to create content to engage Facebook Users. This brings us to the other question.

Can a free only (not Freemium like LinkedIn) sustain the business?

One potential solution’s for Facebook’s revenue growth challenges would be to charge businesses for the currently free business pages. The challenge in this is coming up with a pricing model. How does an online fan base convert to an offline purchase? Does this vary by type of good? In the case of a large ticket item such as a car, GM can track individual purchases and compare these purchases to their Facebook Fan base.

For small ticket items, the “Facebook effect” is nearly impossibly to quantify. For example, Coca Cola has 42M Facebook Fans yet the company delivers over 1.8 Billion servings per day globally. With Coca Cola’s global distribution, this means that per capita everyone on the planet consumes 1.8 servings of a Coca Cola product per week ((1.8B servings / day * 7 days/ week) / 7B people). Can Coca Cola document that these 42M fans buy more Coca Cola products per capita than the 1.8 servings the rest of the world is averaging.

A potential solution to this is to enact a revenue model similar to “old media” and charge per thousand impressions (CPM). But where should the CPM land? Lime Design Research has shown the following CPM rates by category of advertising:

Large Event – Super Bowl Ad CPM Rates ~$25 – $35
Network Primetime CPM: ~$15 – 20
Cable Daytime CPM: ~$10 or less
Outdoor Advertising (Billboards, etc.) CPM:  ~$1 – 5

So, if Coca Cola’s 42M fans engage on average once monthly and the CPM is $15 the “advertising value” of this channel to Coca Cola is $403K per year. This model is a fair way to value the advertising channel. Brand owners can use it to compare advertising activities across channels.

By this same logic the “advertising value” of  GM’s 382K Facebook Fans  varies from  a low of $68K at a CPM of $15 to a high of $160K at a CPM of $35 (Super Bowl Rates).  So, with $40M in total spending ($10M ads + $30M content), GM is spending $104 per Facebook like.  To put this number in context, GM is projecting to sell 14.5 Million vehicles in 2012.  If you buy one of these vehicles GM will know your demographics, address, financial history etc. through the loan verification process.  Plus, all your friends will know what you drive when you pick them up…

To conclude:

  1. Brand owners in both large and small ticket items face challenges quantifying the Facebook effect.
  2. To hit their revenue targets, Facebook is going to have to charge businesses to access the audience.  Problems exist with pricing the offering and delivering on the value proposition to large brand owners.

About Tim McCaffery

As the Co-Founder and Chief Executive Officer of Lime Design, Tim leverages his considerable experience developing innovative solutions for consumer, commercial, and military markets. Previously at the U.S. Army, Mr. McCaffery managed the development and deployment of military equipment utilizing disruptive technologies. In addition to his experience with the U.S. Army, Mr. McCaffery has experience marketing new products with startup companies. In addition to his role at the ARMY, Mr McCaffery has been a Corporate Intrapreneur at a Fortune 500 Company. Mr. McCaffery holds a B.S. in Chemical Engineering from the University of New Hampshire, a M.S. in Materials Science and Engineering from the University of New Hampshire, and a MBA from the MIT Sloan School of Management.
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