Digital Intelligence Copyright ©2012 eMarketer, Inc. All rights reserved.

Why Facebook Is Struggling to Increase Ad Revenue 2

Seven Keys to Success 4

Three Things Facebook Should Do 10

eMarketer Interviews 12

Related eMarketer Reports 12

Related Links 12

About eMarketer 13

June 2012

Executive Summary: When General Motors pulled its advertising from Facebook, many took it as an indication that the social network’s ad products didn’t work. But in reality, the pullout tells a different story.140356

In 2011, major marketers dramatically increased their spending on Facebook, buying up the site’s so-called “Premium” ad inventory—ads on users’ homepages and in other exclusive spots—in a quest to acquire “likes.” This year, some marketers have reduced spending on these Premium ads so they can reassess the ads’ effectiveness. As a result, Facebook has seen weaker-than-expected revenues in 2012.

However, the company has another side to its ad business. Marketplace, the self-serve platform, is gaining new prominence. In May 2012, Facebook announced that it would start allowing advertisers to place Premium ads in users’ news feeds by tapping the technology that supports Marketplace. The change is expected to inspire marketers with bigger budgets to begin using the automated system. This month, Facebook said it would launch Facebook Exchange, a real-time bidding platform for Marketplace inventory.

The importance of Marketplace is often underestimated. Because the clickthrough rates on these ads are miniscule and because their limited creative palette will never win them awards, Marketplace ads get little respect.

Yet when Marketplace targeting and bidding are done correctly, advertisers can be highly successful. Several ad-technology startups use tools provided by Facebook to maximize the effectiveness of these ads; other digital marketing firms have taken notice and they too are entering the market.

As the questions around Facebook’s advertising revenues swirl, the Marketplace business deserves a second look.

Key Questions

■ What do Marketplace advertisers do differently?

■ How can businesses use Marketplace and Premium ads together?

■ What else should Facebook do to bring Marketplace-style efficiencies to its Premium business and re-attract skeptical big brands?

■ How are ad-technology firms helping marketers make their Facebook advertising more effective?

% of total

Frequency with Which US Facebook Users Click on Online Ads or Sponsored Content When UsingFacebook, May 2012

Often/sometimes17%

Hardly ever/never83%

Note: n=476 ages 18+Source: Associated Press (AP) and CNBC conducted by GfK Roper PublicAffairs & Corporate Communications, May 15, 2012140356 www.eMarketer.com

Debra Aho Williamson dwilliamson@emarketer.com

Contributors Lauren McKay, Tracy Tang

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look Copyright ©2012 eMarketer, Inc. All rights reserved. 2

Why Facebook Is Struggling to Increase Ad Revenue

Facebook’s ad revenue fell short of expectations in the first quarter of 2012, and there are indications that Q2 was softer than expected as well. But in surveys conducted in late 2011 and early 2012, marketers gave no clue they were planning to decrease their use of advertising on Facebook.

In a November 2011 survey, Advertiser Perceptions found that marketers and agencies expected social media advertising to receive a 27% share of online display advertising spending in the following 12 months, up from a 22% share in the previous 12 months.

% of budget

Past and Future Online Display Ad Spending Share forSelect Platforms According to US Marketers andAgencies, Nov 2011

Past 12 months27% 23% 22% 15% 9% 5%

Next 12 months26% 20% 27% 14% 9% 5%

Publishers (content)Ad networks/exchangesSocial media advertising (Facebook, etc.)PortalsDSPs (demand-side platforms)Agency trading desks

Note: numbers may not add up to 100% due to roundingSource: Advertiser Perceptions, "Advertiser Intelligence Reports Wave 16:Digital Media Landscape," Feb 29, 2012138103 www.eMarketer.com

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And 59% of these same survey respondents said they expected to increase social ad spending, nearly double the percentage who said they would boost spending on ad networks and exchanges. At that time, only 4% of respondents indicated that their social spending would decrease in the coming year.

% of respondents

Change in Online Display Ad Spending for Select Platforms in the Next 12 Months According to US Marketers and Agencies, Nov 2011

Ad networks/exchanges31% 58% 11%

Publishers (content)29% 60% 10%

DSPs (demand-side platforms)24% 62% 14%

Portals21% 64% 15%

Agency trading desks15% 69% 16%

Increase Stay the same Decrease

Note: numbers may not add up to 100% due to roundingSource: Advertiser Perceptions, "Advertiser Intelligence Reports Wave 16:Digital Media Landscape," Feb 29, 2012

138102 www.eMarketer.com

Social media advertising (Facebook, etc.)59% 37% 4%

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Companies surveyed by Efficient Frontier, meanwhile, said they expected to dedicate 5% of their total online ad spending to Facebook by the end of 2012, nearly double the 2.7% of total online ad spending they sent the social network’s way in the fourth quarter of 2011.

% of total online ad spending

Ad Spending on Facebook by US Companies, Q4 2011 & 2012

Source: Efficient Frontier, "Global Q4 2011 Digital Marketing PerformanceReport," Jan 12, 2012136055 www.eMarketer.com

Q4 2011 End of 2012

Facebook5.0%

Other 95.0%

Facebook2.7%

Other 97.3%

136055

However, surveys on expected spending plans are just that—guesses about future plans. The reality for Facebook in the first half of 2012 was that marketers pulled back. Ad revenues declined 7.5% between Q4 2011 and Q1 2012.

Although the first quarter is typically soft for media companies, the slippage at Facebook, whose revenues had been on a strong upward trajectory, has been cause for concern.

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look Copyright ©2012 eMarketer, Inc. All rights reserved. 3

millionsFacebook Ad Revenues Worldwide, Q1 2010-Q1 2012

Q1

$340

Q2

$424

Q3

$450

Q4

$655

Q1

$637

Q2

$776

Q3

$798

Q4

$943

2010 2011 2012

Q1

$872

Source: Facebook, "S-1 Registration Statement: Amendment No. 4," April 23, 2012139447 www.eMarketer.com

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Facebook’s second quarter financial results weren’t available before this report was published, but several investment banks lowered their expectations in advance of the social network’s May 2012 IPO. Morgan Stanley, for example, projected total revenue (including ads and payments) of $1.111 billion in Q2 2012, down 5.45% from its earlier projection of $1.175 billion.

Facebook’s cause wasn’t helped by General Motors’ decision to pull its estimated $10 million ad budget from the site. Although $10 million is a tiny fraction of Facebook’s $3.15 billion in 2011 ad revenue, the pullout indicates that some major marketers are not finding success with the ad formats Facebook offers.

In eMarketer’s recent conversations with digital agency executives and marketers, there was a common theme: The first part of 2012 got off to a slow start when it came to planning Facebook ad spending.

For example, at one digital agency, client spending on Facebook was flat year over year. A number of this agency’s clients had made annual deals with Facebook for 2011, but most decided not to make a similar upfront commitment for 2012. Instead, they planned to buy throughout the year.

A small survey of 21 agency media executives by ITG Investment Research found that nearly half didn’t plan to increase their Facebook ad spending in 2012.

Some advertisers have balked at the $10,000 minimum monthly spend that Facebook requires in order to place Premium ads. The result, in some cases, has been shifted ad spending to lower-cost Facebook ad options.

Capstone Investments, an investment bank, said in an April 2012 research report on Facebook that “in many cases large CPG advertisers are seeing comparable ROI on self-serve ads [to those] they were achieving on premium ads and are allocating spend that otherwise would go to premium ads to self-serve ads.”

The general feeling among many advertisers is that they spent too heavily in 2011, said Simon Mansell, CEO of Facebook advertising firm TBG Digital.

“The whole market—us, Facebook, everyone—got a bit distracted with all these brands piling in,” Mansell told eMarketer. “Everyone was obsessed with getting more fans, getting more connections, spending money on social media. Now I feel like it’s coming back to, ‘Well, why are we spending money here? Why do we want to get to 20 million fans? What are they actually worth?’”

Others feel that Facebook advertisers need to change their mindset:

■ “A lot of the brands that get caught up in ‘social advertising doesn’t work’ tend to be more traditional marketers that are trying to provide a more traditional approach to social media—maybe the same approach they are applying to search advertising or even applying to their display advertising or DSP campaigns,” said Dave Williams, CEO of BLiNQ Media, in an interview with eMarketer.

■ “Before accusing Facebook of not having the solution for brands, brands need to be able to ask themselves how permeable they are to change their strategy to be aligned with Facebook. Facebook is not like Google. There is no way that the same ad that you are placing on NewYorkTimes.com or in Google.com will work without modifications from Facebook,” Facundo Maldonado, vice president of Ybrant Social, a unit of digital marketing agency Ybrant Digital, told eMarketer.

The Two Sides of Facebook’s Ad Business

Facebook’s ad business is divided into two parts: Marketplace and Premium. They serve different functions and are typically used for different marketing goals.

Marketplace Ads

■ Self-serve/automated system

■ Bought via online auction

■ Priced based on cost per click (CPC) or cost per impression (CPM)

■ Usually appeal to advertisers wanting specific performance results, such as playing a game, installing an app or signing up for an event

■ Typically appear on the right side of most pages in a vertical column; can also appear on photo pages and on game pages; starting in mid-2012 can also be placed in the news feed (mobile, desktop or both)

■ Companies can buy ads themselves using the self-serve tool, but larger businesses usually work with technology companies or media buyers that have access to Facebook’s Ads API. These companies have built technology and analytics on top of the API to help clients with ad creation, campaign management and analytics

■ Can have social context (pictures and/or names of friends)

Why Facebook Is Struggling to Increase Ad Revenue

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look Copyright ©2012 eMarketer, Inc. All rights reserved. 4

Premium Ads

■ Sold by Facebook’s ad sales team and placed via an insertion order

■ Always priced on a CPM basis

■ Typically appeal to larger brands that want to build broad awareness and reach a large quantity of Facebook users

■ Appear on the right side of a user’s main news feed; within the newsfeed (both desktop and mobile); and on the logout screen

■ Can have social context

A complete description of Facebook’s ad types is available here.

Historically, eMarketer has estimated that Marketplace accounts for 60% of Facebook’s total ad revenue. That translates to $1.89 billion in 2011 ad revenue from Marketplace ads and $1.26 billion from Premium formats.

millions and % changeFacebook Ad Revenues Worldwide, 2009-2011

2009

$764

2010

$1,868

145%

2011

$3,154

69%

Facebook ad revenues % change

Source: Facebook, "S-1 Registration Statement," Feb 1, 2012136926 www.eMarketer.com

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Facebook does not break out revenue from its Marketplace and Premium ad businesses.

Seven Keys to Success

Facebook’s self-serve ad platform has evolved greatly since it first launched in 2007. The ad quality has gotten noticeably better, the targeting has improved, and with the 2011 opening up of the Facebook Ads API, multiple startup businesses have built technology to automate the process of bidding and placing ads.

The marketers that get positive results from these ads value their deep targeting capabilities and the auction-style interface for bidding. Facebook advertisers can learn from the tactics and techniques these marketers use, whether their goal is performance or branding.

Here are the seven keys to their success:

They let technology do the heavy lifting

While companies can place ads themselves using the self-serve interface, larger marketers often work with one of the companies that have access to Facebook’s Ads API. These firms, such as AdParlor, Adobe, TBG Digital and BLiNQ Media, have built technology on top of the API to give advertisers capabilities such as:

■ Mass ad creation

■ Creative and target-audience testing

■ Automatic bid optimization

■ Conversion tracking

■ Cross-channel click attribution

As of mid-June 2012, there were 44 companies listed in Facebook’s Preferred Marketing Developer Directory that had these capabilities, though there are dozens of other firms that also offer advertising services on Facebook. Among them were several demand-side platforms, including Turn, MediaMath and DataXu, which in summer 2012 are expected to start offering Facebook inventory via real-time bidding.

“A lot of advertisers, when they’re testing out Facebook ads as a new advertising opportunity, fail to dig deep enough into the targeting capabilities, and that’s the strongest value proposition that Facebook offers for their ad platform,” said Chad Warren, senior manager of product marketing of social media at Adobe, in an interview with eMarketer.

According to Social Fresh, a social media education company, the most common targeting criterion has been age, used either always or often by 55% of respondents to a March 2012 survey. But fewer than one-third of respondents targeted people based on their language (26%) or their education (24%).

Why Facebook Is Struggling to Increase Ad Revenue

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look Copyright ©2012 eMarketer, Inc. All rights reserved. 5

% of respondents

Facebook Ad Targeting Used by US FacebookAdvertisers, March 2012

Age 55%

Country 53%

Precise interest 50%

Broad interest 42%

Interested in 41%

Connections 37%

State 35%

City 34%

Gender 34%

Friends of connections 33%

Language 26%

Education 24%

Zip 18%

Workplace 17%

Relationship7%

Note: n=347 who chose "always" or "often"Source: Social Fresh, "The 2012 Facebook Ads Report," April 4, 2012138899 www.eMarketer.com

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Marketers’ narrow use of Facebook’s ad targeting capabilities is due to the complexity of Facebook’s ad tool, according to Social Fresh. “It is easy to use, but the sheer number of options creates a lot for the average business to learn before they can maximize the power of Facebook ads,” Social Fresh’s “2012 Facebook Ads Report” stated.

Ad agencies and social media marketing firms are taking notice of the developments in the Facebook third-party ad services business:

■ In January 2012, Adobe acquired Efficient Frontier, a paid search and Facebook ads company.

■ In February 2012, social media management company Buddy Media acquired Brighter Option, a Facebook ads firm, and created a new division called BuyBuddy. In a blog post describing the acquisition, Buddy CEO Michael Lazerow wrote, “The ease and speed in which Facebook ads can be generated, uploaded and managed via Brighter Option’s social ad management software saves both time and money for brands and agencies.” Buddy Media itself was acquired by Salesforce.com in June 2012.

■ Also in February 2012, Wildfire Interactive began integrating technology startup Adaptly’s social ad optimization services into its social marketing product.

■ In May 2012, Vitrue, a Buddy Media competitor, announced partnerships with seven ad-technology firms that work with Facebook, including Marin Software, Optimal and Nanigans. The same month, Oracle announced it would acquire Vitrue. Meanwhile, WPP Group, an investor in Buddy Media, said its Group M media buying unit would use Buddy for all of its Facebook ad buying.

■ In June 2012, Facebook marketing company Syncapse acquired Clickable, a social media and search ad management company.

“People are realizing that they’re ready for this solution of scale,” said Peter Goodman, CEO of BuyBuddy. In the past, “people would say, ‘Oh, I can’t really—it’s almost too much.’ And I think what we’ve seen in the last couple of years is that people are realizing, ‘Actually, it’s not too much, I just need to embrace it.’ If you’re spending $10,000, $50,000, $100,000 in advertising in one month to promote content, you want to make sure the right content is being promoted.”

As Facebook continues to grow, the targeting capabilities of its ads will only increase. Working with a partner connected to the Ads API gives marketers the ability to manage Facebook advertising more efficiently and get the best price for reaching the target audience.

‘Test, learn and change’ isn’t just marketing-speak

Advertisers that are most successful on Facebook routinely test thousands of combinations of ad creative, targeting and bid prices. They are able to get results in near-real time, and they use those results to refine target audiences, change their bid prices and remove creative that doesn’t work.

All this happens without active involvement from the advertiser, which means an advertiser must give up a certain amount of control over its campaigns. But in return, a company gains valuable experience in what it means to market in real time.

“The best success we’ve seen within Facebook Marketplace has generally been with customers that are able to run various versions, understand that data, be willing to test and try new versions quickly, and then scale what they see is successful,” said Grady Burnett, Facebook’s vice president of global marketing solutions, in an interview with eMarketer. “We certainly do see tweaks and changes in the Premium campaigns—probably not as much as in Marketplace, but it’s still very important. It’s important to learn. There’s a lot of data out there.”

In Social Fresh’s March 2012 survey, two-thirds of respondents said they were testing ad creative and 61% were testing ad targeting. But that left one-third who were using the same creative for all ads and 39% who weren’t comparing different ad targeting options.

The percentage of respondents who were testing various types of landing pages was even smaller, at 35%.

% of respondents

Parts of Ads that US Facebook Advertisers AreSplit-Testing, March 2012

Ad creative 66%

Ad targeting 61%

Landing page 35%

Source: Social Fresh, "The 2012 Facebook Ads Report," April 4, 2012138901 www.eMarketer.com

138901

Seven Keys to Success

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look Copyright ©2012 eMarketer, Inc. All rights reserved. 6

This “test-learn-change” attitude extends to Facebook’s ad formats that include social context, such as the name of a friend who liked or interacted with a brand, or a post that was turned into an ad using the site’s Sponsored Stories format.

Marin Software, which provides technology to manage online advertising, found that its clients devoted 23% of their Facebook ad budgets to social ads in early 2012, up from 5% the previous year. Marin predicted that half of all Facebook ads would have social features by the end of 2012.

“The changes that Facebook has made around these social ads to increase their prominence on the website and make them more accessible to advertisers have really paid off, and we’re seeing advertisers shift their budget towards more social advertising,” said Matt Lawson, vice president of marketing and partnerships for Marin Software, in an interview with eMarketer.

They place a high value on speed

Speed is a key attribute of successful Marketplace advertisers. Instead of agonizing over the wording of an ad or finding the perfect image, experienced Marketplace users simply launch many versions. And they learn very quickly which ads are working by tracking clicks, fan growth and other metrics.

“The moment you launch a campaign on Marketplace, you get data in 10 minutes, 15 minutes maximum,” said Nikhil Sethi, co-founder of ad technology firm Adaptly, in an interview with eMarketer.

Speed is also a key attribute of the Facebook Exchange real-time bidding platform, which enables an advertiser to target an ad to a particular user within 1 second of that user visiting a webpage.

This focus on swiftness has another benefit that extends beyond Facebook. Advertisers have long talked of being able to place ads in response to events, trending keywords or hot topics, but many companies are not set up to approve media buys in real time.

Marketers surveyed in March 2012 by PulsePoint, a digital technology firm, ranked real-time measurement and optimization as their third-highest digital marketing priority, behind measuring campaign performance and optimizing marketing within various channels. The pace with which Marketplace advertisers can test and change their ads provides companies a way to achieve that goal.

% of respondents

Leading Digital Marketing Priorities According to USMarketers, Agencies and Publishers, March 2012

Measuring campaignperformance

Optimizing within channels

Real-time measurement & optimization

Attributing resultsacross channels

Unified customer view

Employing newer channels

Dynamically serving ads & content

Consistent branding across channels

Social listening for content & influencers

Applying cross-channellessonsPaid, owned & earned media frameworkSeamlessly execute across programs

Buying & targetingsegments at scale

Reaching target audience via real-time bidding

Marketers

64.4%

45.0%

31.3%

28.8%

23.8%

23.1%

14.4%

13.8%

13.8%

13.1%

11.3%

10.6%

10.0%

-

Agencies

41.9%

16.1%

19.4%

31.2%

22.6%

36.6%

17.2%

18.3%

16.1%

11.8%

24.7%

17.2%

14.0%

10.8%

Publishers

25.4%

31.0%

11.3%

15.5%

25.4%

42.3%

18.3%

28.2%

16.9%

7.0%

16.9%

9.9%

36.6%

12.7%

Note: top 3 priorities in the next 12 monthsSource: PulsePoint, "Bridging the Digital Divide," May 8, 2012140305 www.eMarketer.com

140305

They combine Premium and Marketplace ads for the biggest impact

Facebook positions Premium ads as exclusive opportunities for brands to achieve broad reach in an environment with less clutter. Marketers tend to use Premium ads for branding goals, such as creating broad awareness for a new movie or announcing a new product.

But the smartest Facebook marketers combine Premium ads with Marketplace ads. They might use Premium ads as part of a larger branding campaign and Marketplace ads as the always-on engine that drives a steady stream of new fans.

And now that advertisers can place ads in Premium slots in the news feed via the Marketplace platform, the need to find the right combination of Premium and Marketplace ads is more important than ever. Previously, advertisers needed to commit to a minimum monthly budget on Facebook in order to get Premium ads. Now, advertisers can get certain Premium slots without that hefty obligation.

Social Fresh found that ads placed with a Facebook ad rep’s help (i.e., Premium ads) had a similar cost per click and clickthrough rate as ads placed without a rep (i.e., Marketplace ads).

Seven Keys to Success

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look Copyright ©2012 eMarketer, Inc. All rights reserved. 7

Average Facebook Ad CPC and CTR with vs. Without aFacebook Ad Representative*, March 2012

Clickthroughrate

With a Facebook ad representative 0.05%

Without a Facebook ad representative

Cost perclick

$0.78

$0.83 0.04%

Note: *who will help you use their premium products and assist creatingad campaignsSource: Social Fresh, "The 2012 Facebook Ads Report," April 4, 2012138903 www.eMarketer.com

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“Typically, marketers are using Marketplace as a way to drive a lot of performance or scale through their campaign very efficiently. The cost in Marketplace is typically a lot less; there is the ability to target users specifically; and there is a better ability to target and deliver the right creative against the right audience,” said Williams of BLiNQ Media. “When advertisers are running Premium placements, they are looking for reach and frequency at scale during certain key periods. It could be for a Super Bowl ad they are looking to run. It could be a one-day promotion. We’re seeing the big brands want to do that, and they also want to support the lead-up into it, and even the post-campaign, with Marketplace.”

Examples of combining the two ad types include:

Domino’s: For a December 2011 “Global Domino’s Day” promotion offering 50% off of online orders in 20 worldwide markets, the pizza chain used Marketplace ads to tease the event and then placed Premium ads on the day of the event to drive clickthroughs to the app where orders could be placed. The promotion resulted in 542,000 people visiting their local online ordering site and led to a record week for online sales and orders in the US.

Expedia: The online travel agency wanted to increase its fan base, so it asked Facebook users to enlist their friends’ help to try to win a vacation package giveaway. Working with Adobe, Expedia used a combination of Marketplace and Premium ads, as well as email and print marketing, to encourage participation. By adding social context to some ads, Expedia was able to capitalize on friends’ relationships with each other. The company also segmented targets, aiming specific creative at highly engaged audiences. The promotion led to a 750% increase in Expedia’s fan base to over 1.1 million.

Combining Facebook ad types can lead to greater efficiencies, Adaptly’s Sethi said. “If you’re going to do a Premium buy, run a small portion of the budget on Marketplace, the exact same creative, and just learn from the data and then apply it to the Premium buy,” he said. “In some cases we’ve seen anywhere from 15% to 25% improvement in pure CPM cost when you learn from Marketplace and apply it to Premium.”

They use the data they gain from a campaign to improve the next one

Facebook is often criticized because the metrics it provides never seem to be enough for advertisers. This is especially the case on the branding side, for which the success of the advertising is more difficult to assess.

Ads API partners have created analytical tools that layer on top of the data that Facebook provides, enabling their clients to build sophisticated targeting models. They take data from one campaign and apply it to the next campaign.

“We’ve had tremendous success with clients who have looked at the data from the campaigns that they had run and saw what was successful and were able to build subcampaigns and to alter their program to more heavily target or more specifically target a specific audience,” said Adobe’s Warren.

Examples:

Florida’s Natural: The juice maker (a client of BLiNQ) assumed that its Facebook target audience would be “moms interested in juices and breakfast foods,” Williams said. “We found out that the No. 1 performing segment for them was people who are patriotic,” he added. “Every time we run a new campaign for a new brand we are always running ideas for new segments of audiences that are extremely responsive to the brand based on this research.”

Acer: The computer company promoted a sweepstakes to give away a laptop a day to Facebook fans. Using Adobe technology, Acer was able to mine the data of the people who had clicked on its ads and also those who then went on to sign up for the sweepstakes. Acer found that the target words it expected to perform well—terms associated with technology, smartphones or entertainment—actually fared worse than ads that ran on clothing-oriented pages. The company was then able to quickly adjust the targeting parameters, and as a result, 71% of its new “likes” during the campaign came from paid media.

They use ad targeting technology to gain the right fans

Marketplace advertisers and the ad-technology firms that work with Facebook’s Ads API are using sophisticated segmenting tools to make sure that their ads are aimed at the people most likely to be supportive of the brand and who want to share brand messages with their friends. Little by little, they are helping companies get past the knee-jerk response that on Facebook, the number of fans determines your success.

Marketers aren’t giving up their fan-base fixation very easily, though. According to a survey by Wildfire, 57.3% of respondents considered increasing their fan/follower base a primary objective of social media advertising, far ahead of goals such as extending the reach of branded content (24%) or marketing to existing fans (17%).

Seven Keys to Success

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look Copyright ©2012 eMarketer, Inc. All rights reserved. 8

% of respondents

Primary Objective of Marketers Worldwide WhenRunning a Social Media Ad Campaign, April 2012

Increasing fan/follower base57.3%

Increasing reach of branded content24.0%

Increasingengagement

with existingfan/follower base

17.0%

Keeping pace with competition1.6%

Note: numbers do not add up to 100% due to roundingSource: Wildfire as cited in company blog, May 17, 2012140633 www.eMarketer.com

140633

But the next generation of Facebook advertising optimization tools seeks to generate the best fans, not just any fans.

“If a company is saying, ‘We want to add 100,000 fans to our fan page,’ they should be getting the right 100,000 fans through their ads—fans who are going to continue to engage in the brands, who are going to talk about it favorably, who are going to foster more viral engagement—rather than getting fans who are not really fans,” said Tom Rikert, director of product management at Wildfire, in an interview with eMarketer. “They might click on the ad once because it was enticing but they never come back to the company’s fan page. They never engage.”

Examples:

BLiNQ: The company’s pre-planning tool, LIFT (Like Interest Fan Targets), is a database of over 500,000 topics and interests of Facebook users. BLiNQ uses it to help determine which interest categories are the closest match to a brand. “What that allows us to do is launch a campaign out of the gate almost fully optimized, instead of having to try and find those targets later on in the campaign lifecycle. We know which targets we should be going after,” said Williams.

Adaptly: Over time, many companies have focused on the cost efficiency aspects of gaining fans. In other words, the cheaper the fan, the better. But in the next phase of advertising optimization, improved analysis of the costs of targeting various fan groups will become more important. “Based on cost efficiency, some brands may say, ‘I just want to get as many fans as possible for as cheap as possible. Let’s go after any interest that drives cost efficiency,’” said Sethi. “I think from a targeting point of view it becomes really, really pertinent to start to look at quality as an important factor, in some cases even more than cost.”

Spotlight: Jackson Hewitt Boosts Engagement with Facebook Marketplace Ads

Tax prep service engages consumers and grows fan base with social site campaign

Jackson Hewitt, an income tax preparation service, does the majority of its business between the months of January and April. In order to promote its services during tax season, and to build and strengthen its Facebook fan base, the company launched its first Facebook Marketplace ad campaign during the early months of 2012. The goal, according to David Koroghlian, director of interactive and social media, was to not only acquire more Facebook fans, but to use paid advertisements on the site to create engagement.

The Marketplace ads promoted Jackson Hewitt’s Digital Dance-Off game and a sweepstakes running on its Facebook page. The game encouraged players to use their keyboards to match dance moves on the screen. The contest entered users to win a gift card to Wal-Mart, where Jackson Hewitt has about 2,800 locations. For current fans of its brand, Jackson Hewitt advertised an incentive: They could opt in to receive a coupon for $25 off tax preparation.

In launching the ads, Jackson Hewitt used Facebook’s Marketplace self-service ad platform and also implemented a number of add-on tools to fine-tune the ad targeting. According to Christopher Tuff, SVP and director of earned and emerging media at Jackson Hewitt’s agency, 22squared, predictive modeling, targeting and optimization tools from Facebook advertising service provider BLiNQ Media were used to ensure the campaign was only targeting users with an inclination to like the brand.

“By going through Facebook’s API, we can profile our consumer against 10,000 pages and pull out about 1,000 different targets,” Tuff explained. “We can see what interests to target without doing it retroactively through optimization.” Based on the modeling, 22squared was also able to target the user interests that rose to the top.

The intense modeling and ad targeting delivered solid results. “Our fan growth was north of a 2,000% increase,” Koroghlian said. “Engagement also increased 900%. Both are pretty high numbers for us.” The engagement metrics took into account the average number of comments, “likes” and shares year over year. Jackson Hewitt’s fan base grew from 6,709 fans pre-2012 tax season to 162,513 at the end of it.

When it comes to using Facebook ads for fan acquisition, Tuff underscored the importance of gaining the “quality fan,” rather than the random user who will never engage with the fan page again.

“Coupling the engagement KPI with interest targeting, we’re delivering not only low cost for spend but high-quality fans,” Tuff said. On top of that, Koroghlian

Seven Keys to Success

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look Copyright ©2012 eMarketer, Inc. All rights reserved. 9

pointed out: “We are trying to acquire fans who are not only likely to interact with us on the page, but are also likely to transact with us in-store.”

In the future, Koroghlian said, it would be beneficial for Facebook to develop more paid local advertising opportunities for franchises like Jackson Hewitt. Given Jackson Hewitt’s business model, the brand would someday like to give franchises their own pages and the ability to run paid ads to help build engagement with local fans. —Lauren McKay

They look beyond clickthrough rate

One of the worst raps Facebook ads have gotten is that their clickthrough rate (CTR) is abysmal. According to TBG Digital, the US average CTR for Marketplace ads in 2012’s first quarter was 0.034%. In Canada, the UK and Germany, the rate was even lower.

At Google, a company that Facebook is often compared to, paid search ads had a CTR of 2.12% in Q1 2012, according to Marin Software.

Meanwhile, at Facebook, CTR declined between Q4 2011 and Q1 2012 in France, the US and Germany, TBG found; it suggested that the cause may have been an increase in the number of ads per page.

Average Clickthrough Rate (CTR) for FacebookMarketplace Ads in Select Countries, Q1 2011-Q1 2012

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012

France 0.034% 0.022% 0.023% 0.045% 0.039%

US 0.031% 0.031% 0.037% 0.037% 0.034%

Canada 0.054% 0.028% 0.028% 0.029% 0.030%

UK 0.027% 0.023% 0.024% 0.027% 0.030%

Germany 0.023% 0.021% 0.036% 0.030% 0.029%

Note: figures based on 268 billion impressions servedSource: TBG Digital, "Global Facebook Advertising Report: Q1 2012," April 16, 2012140265 www.eMarketer.com

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Click rate is highly dependent on what type of company the advertiser is. AdParlor analyzed the cost per click and clickthrough rates for more than 1,000 ad campaigns purchased through the company between Sept. 1, 2011, and Feb. 27, 2012. The analysis showed that industries typically perceived as more exciting saw a higher average daily CTR, with ads for movies and entertainment performing nearly five times as well as those for banking services.

Average Worldwide Clickthrough Rate (CTR) onFacebook, by Industry, Sep 2011-Feb 2012

Movies/entertainment 0.11%

Electronics 0.10%

Automotive 0.08%

Apps 0.06%

Promotions 0.04%

Beauty/cosmetics 0.04%

Food/CPG 0.04%

Tourism 0.03%

Health/fitness 0.03%

Merchant/banking services0.03%

Note: bulk of the traffic studied is from the US; figures were calculated byaveraging daily CTRs from Sep 1, 2011 to Feb 27, 2012; data based on adspurchased through AdParlorSource: AdParlor, March 2, 2012137673 www.eMarketer.com

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Facebook, of course, is defensive about the low clickthrough rate: “It’s really important that an advertiser knows what their key objective is because the clickthrough rate is not the end-all be-all,” Burnett said.

“We now have the ability to report on campaigns by ‘likes,’ app installs, or ‘people talking about this.’” Burnett added. “There are other key metrics that really matter for a business, and it’s just a matter of figuring out, ‘Is that an install? Is that a sale? Is that a list sign up? Is it something different?’ And that’s probably the most relevant thing to track towards.”

But while click rate is a standard metric across the web, successful advertisers on Facebook are starting to focus less on driving clicks and more on understanding what happens after the click. They are beginning to use more sophisticated tracking tools—provided by Facebook and also by ad technology companies—to determine how to attribute an action when it occurs and also how to target ads to people depending on what sort of action they want to inspire.

“If [CTR] is the only metric that people look at on Facebook, then it’s like pushing water uphill. But that’s not what Facebook’s about; it’s about looking at every data point that’s possible—engagement, ‘likes,’ shares, whatever it may be,” said BuyBuddy’s Goodman.

Features that help marketers go beyond the click include:

Facebook’s Conversion Spec: In April, Facebook began offering a tool that allows companies using the Ads API to segment ads so they are delivered only to people who have the best chance of taking some sort of post-click action, such as talking about or sharing a brand’s content, installing or using an app, or checking in.

Facebook’s Optimized CPM: This feature lets advertisers optimize their campaigns based on goals such as actions taken on Facebook, reach, clicks and social impressions.

Seven Keys to Success

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look Copyright ©2012 eMarketer, Inc. All rights reserved. 10

Nanigans’ Ad Engine: The company’s Facebook advertising software allows marketers to optimize ads for post-click activity, such as completing a form, adding something to an online shopping cart or making a purchase.

Attributing actions from Facebook is very much a work in progress, but gaining insight into response beyond the click will help advertisers to see what is successful.

As Mark Hughes, CEO of attribution measurement firm C3 Metrics, said in a blog posted on iMedia Connection in May 2012: “100% of the success with current ad tracking systems goes to that last-clicked ad, merely a navigational endpoint before purchase, not what got the consumer going. If a consumer saw an ad for Zappos on their Facebook page and eventually made a purchase, the last click before their purchase—in many cases a search engine—would get the credit.”

As long as Facebook continues to refine post-click tracking, it will go a long way toward convincing marketers to pay less attention to clickthrough rate.

Three Things Facebook Should Do

Facebook’s advertising business is constantly evolving and changing, and, as highlighted earlier, the companies that achieve the most success are those willing to experiment and use technology to make better, faster decisions. The final verdict on Facebook’s ability to build a strong advertising business won’t come overnight. However, there are three things that Facebook could do in the near term to make a better case to the advertising community that its products do work.

Break down more walls between the two sides of its ad business

In May 2012, Facebook began allowing its Ads API partners to place ads in users’ news feeds, something previously reserved for Premium advertisers. Advertisers can use Facebook ad-technology firms to place Sponsored Stories ads in the news feed on the desktop, on mobile devices, or in a combination of the two.

It was a major development toward simplifying the Facebook ad-buying experience. Said Maldonado of Ybrant Social: “Premium is an amazing format, but is lacking on detailed stats, ability to optimize and faster implementation. Allowing clients to buy [Premium ads] through API access will for sure be a solution for these three issues.”

“It represents a new opportunity for true premium ad inventory, with the clearest benefactors being large brand advertisers,” said Adobe’s Allen. “The Facebook newsfeed is some of the best real estate on the web: very highly engaged audience, deep behavioral targeting, very powerful.”

And the drumbeat is getting louder for Facebook to bring down another wall and allow all Premium ads to be purchased and placed in an online auction. Facebook has resisted this idea, seeking instead to position Premium as exclusive territory for high-paying advertisers willing to commit to a minimum budget—and to pay on a cost-per-impression basis instead of the cost-per-click rate that most Marketplace advertisers use.

However, Facebook is struggling to make the case for marketers to cough up money for Premium slots, and it has performance advertisers who eagerly want to break out of the growing clutter of the right-side column.

Facebook’s Burnett says:

■ “As we’ve talked about Premium over time, it’s generally been a big, top-of-the-funnel, brand awareness type push, which has generally been a longer discussion with bigger marketers who have a certain calendar and a rhythm to that business. I think

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look Copyright ©2012 eMarketer, Inc. All rights reserved. 11

the point of making things simpler is a good one, and we’re always working to try to improve that, and we’ll continue to do so over time, but it’s been important to have that discussion and sort of fall into the rhythm of the business of how most Premium buys are purchased, on- and offline.”

But ad-technology firms say:

■ “The problem is that once I have taken the position to buy, say, a one-week campaign on this [Premium] format, if I am seeing that the results that I am getting are not aligned with the goal of the campaign, or the ad is underperforming, there is nothing I can do,” said Ybrant Social’s Maldonado. “If my ad is not working, I would toss that ad. I’d look for another alternative in order to align the results of that campaign. I can do that with Marketplace ads. Every time Facebook competed in formats between Marketplace and Premium, Premium lost.”

■ “Where it really makes sense for them to do both and for them to be tracked together—it isn’t currently available—is to specifically understand reach and frequency across both channels,” said BLiNQ’s Williams. “Right now they are separated. So you could be running your reach and frequency metrics for Premium, but those are not necessarily going to overlay with your Marketplace reach and frequency metrics. So, a lot of big brands want to know, ‘What exactly are my reach and frequency metrics across the entire Facebook audience?’—not necessarily in these two silos.”

They may sound self-serving, but these executives’ statements have more than a grain of truth. By segregating Premium ads to a different selling mechanism, one with less flexibility and reporting, many of the benefits of Premium are lost.

Prove that adding social features to ads works

Facebook in early 2012 began a concerted push to convince marketers to add social context to their ads. These features range from adding the name of a friend who has “liked” a brand to turning fans’ comments or a brand’s own wall posts into ad units dubbed “Sponsored Stories.”

In early case studies, marketers did see increased clickthrough and interaction when ads carried social features. TBG Digital found in a three-client test that Sponsored Stories ads had a 46% higher CTR than standard Facebook ads. In addition, the cost per click was 20% lower and the cost per fan fell 18%.

AdParlor has found that the clickthrough rate of a Sponsored Story can be as much as 30% to 50% higher and the conversion rate 20% to 30% higher than other Facebook ad types. “That just results in cheaper fans,” CEO Hussein Fazal told eMarketer.

The next step for Facebook is to show more results from Sponsored Stories campaigns and other social ad formats. These ads are unlike anything that marketers are used to.

“The past 10 to 12 years of advertising have always been about real estate—let’s corner off a piece of the website, corner off a piece of your mobile app or corner off a piece of video or a pre-roll,” said Adaptly’s Sethi. “If you look at things like Sponsored Stories, these are ad units that say, ‘We’re going to endemically take the content that already lives within our environment that consumers have created or that you’ve created as a brand, and promote those as the media that gets attention.’”

Deliver a consistent message to advertisers

Facebook has made multiple changes to its ad offerings over the years and there is no sign that the experimentation is over. This frustrates marketers who are used to consistent ad formats and analytics and who want ways to compare ad results from Facebook to other forms of advertising, both online and offline.

But Facebook has made things even more challenging for marketers by using multiple webpages, microsites, blogs and online handbooks to explain its ad offerings. The result is a confusing mishmash of information.

Case in point: Many marketer and agency executives, as well as the media who follow Facebook, do not understand the basic differences between Premium ads and Marketplace ads. In addition:

■ Facebook’s “Premium and Marketplace Products” guide describes over 30 different ad formats, such as the “Page Like Sponsored Story,” “Page Post (Video)” and “Page Post (Text).”

■ Other ad-related documents include the “Facebook Ads Getting Started Guide,” the “Facebook Ads Optimization Guide” and “Measuring Success with Ads Manager.”

■ A website created for the February 2012 Facebook Marketing Conference has its own set of product guides, case studies and information for vertical industries.

■ Facebook Studio, aimed at ad agencies, showcases examples of creative pages and paid advertising and includes a directory of marketing agencies that work with Facebook.

As Facebook continues to experiment with new ad products and tweak existing ones, clearly communicating the changes and reducing the clutter of guides and help documents will give more marketers a better sense of the site’s possibilities.

Three Things Facebook Should Do

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look Copyright ©2012 eMarketer, Inc. All rights reserved. 12

eMarketer Interviews

Who Succeeds with Facebook Ads? Those Who ‘Test and Learn Quickly’

Grady Burnett Vice President, Global Marketing Solutions

Facebook Interview conducted on June 14, 2012

Spotlight: Jackson Hewitt Boosts Engagement with Facebook Marketplace Ads

David Koroghlian Director of Interactive & Social Media

Jackson Hewitt Interview conducted on May 21, 2012

Hussein Fazal CEO

AdParlor Interview conducted on May 2, 2012

Peter Goodman CEO

BuyBuddy (a division of Buddy Media) Interview conducted on May 8, 2012

Matt Lawson Vice President, Marketing and Partnerships

Marin Software Interview conducted on May 15, 2012

Facundo Maldonado Vice President, Ybrant Social

Ybrant Digital Interview conducted on May 15, 2012

Simon Mansell CEO

TBG Digital Interview conducted on May 7, 2012

Tom Rikert Director of Product Management

Wildfire Interactive Interview conducted on May 14, 2012

Nikhil Sethi Co-Founder

Adaptly Interview conducted on May 10, 2012

Chris Tuff Senior Vice President, Director of Earned and Emerging Media

22squared Interview conducted on May 21, 2012

Chad Warren Senior Manager, Product Marketing, Social Media

Adobe Interview conducted on May 11, 2012

Dave Williams CEO

BLiNQ Media Interview conducted on May 10, 2012

Related eMarketer Reports

Brand Advocates: Scaling Social Media Word of Mouth Facebook and Twitter as Media Platforms: News, Video, Photos, Music and Games

Related Links

Adaptly Adobe AdParlor Advertiser Perceptions BLiNQ Media Buddy Media Capstone Investments Efficient Frontier Facebook GfK Roper iMedia Connection ITG Investment Research Marin Software PulsePoint Social Fresh TBG Digital Wildfire Interactive Ybrant Digital

Facebook Advertising: Why the Marketplace Ad Platform Deserves a Second Look Copyright ©2012 eMarketer, Inc. All rights reserved. 13

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