Facebook’s Big Advertising Challenge

One of the many things that puzzles me about Facebook is how it’s able to generate so much advertising revenue.

According to eMarketer, Facebook’s global ad revenue is expected to more than double to $7.64-billion by 2014 from $3.15-billion 2011. It’s obviously impressive but there are two key questions:

1. Who’s clicking on these pay-per-click ads?

2. What kind of ads are attract the most clicks?

When you think about it, Facebook is a social medium – a place where people communicate and share with friends and family. Sure, lots of brands have established dynamic presences but there is growing evidence that people aren’t engaging much with brands, while some major brands have stopped using Facebook as an e-commerce platform.

As GigaOm’s Mathew Ingram pointed out in a recent in-depth post looking at advertising on Twitter and Facebook, both services face a challenge proving that social ads work. It included a great quote from WPP’s Sir Martin Sorrell who said: “The point is that Facebook is a social medium, not an advertising one, like search or display.”

For Facebook, which recently launched Premium Ads, it is important strategically and financially to blend advertising into the overall experience rather than having them as experience outliers. This is going to be particularly crucial when Facebook does its IPO because there will growing pressure for the company to perform financially to justify its sky-high valuation.

To me, the questions posed earlier in this post are perhaps the most interesting because they talk to how people interact with Facebook from a commercial standpoint and whether advertising is seen as enough of a value-add to drive revenue.

From personal experience, many companies advertise on Facebook because it’s cheap. A company can get millions of impressions for a low price because the click-through rate is so low.

Clearly, these ads attract a lot of clicks but who’s doing it and what are the ads that attract their attention? Is it offer for free prizes or product trials? Is it contests? Is it brands with compelling value propositions – if that’s possible given the limited real estate within a Facebook ad unit?

As much the numbers suggest Facebook  is an advertising juggernaut, it’s far from clear why Facebook is such a lucrative advertising vehicle and, as important, whether it can maintain its momentum.

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