It’s time for the platform to mature past the stage of experimentation and help deliver solid business returns
Last week was a kind of like Facebook’s Bar Mitzvah – a time for the social network to grow up and begin taking responsibility for its own actions. Funny that Mark Zuckerberg chose to wear his trademark “hoodie” to ring the NASDAQ bell on the day of the IPO, signaling to the market that he still plans on playing by his own rules.
Zuckerberg may still choose to dress casually, but I would guess he’ll soon begin to feel the pressure of the Street. Facebook needs to share a strategy that will explain how they plan to achieve revenues that will justify its valuation, especially in light of GM’s public announcement that it will pull ads from the platform because it can’t clearly define the value of Facebook ads to its business. With GM as the backdrop, Facebook is working hard to help its advertisers achieve measurable results.
Just last week at the CMA conference, Facebook and L’Oreal took the stage and admitted they were still working together to crack the ROI challenge. While most brands are committed to Facebook as a content channel play, brands publishing content to generate awareness won’t pay a dividend to Facebook investors. And besides, for large advertisers like GM, awareness isn’t the problem. GM needs people to buy cars.
Working in Facebook’s favour is the fact that it is already an immensely profitable company, earning $1 billion in profits on $4 billion in revenue. Also working in its favour is the fact that its entire mobile platform is yet to be monetized, which is promising knowing that the 54% of users who access Facebook through mobile device are two times as active.
But unfortunately, activity (including time on site) does not yet translate into sales. Sure, ads on Facebook can be accurately targeted, but accuracy doesn’t amount to anything if the ads perform no better than their display ad brethren.
Early attempts at “f-commerce” – integrated user experiences where consumers can shop and buy without leaving Facebook – have failed to generate any meaningful results. Otherwise more companies would be doing it. Mind you, most trailblazing Facebook e-tailers haven’t worked to create much in the way of retail excitement to entice Facebook buyers. Brands need to do more than simply put iframe in their e-commerce site. They should emulate companies like BMW, which last year began selling exclusive limited edition brand merchandise on Facebook. In targeting BMW owners, this initiative helped test the potential of f-commerce to drive customer retention and generate advocacy through the network effect. But once again, we are back to putting the onus on brands to develop great content and customer experiences, with a relatively small amount of measurable sales potential in return.
So is Facebook a good bet? The risk is that the tremendous potential of Facebook turns out to be just that. The long term success for Facebook depends on the ability for brands to measure sales. And now that the company is public, they will be measured against other media companies, which are valued based on revenue per user.
According to a recent mathematical model published by the MIT Technology Review, Facebook will have to increase its profit per user by between 160-600% for its current valuation to make sense in this context. At Social Media Group, we’re obviously bullish on the potential of social media. But now that Facebook is a publicly traded company, it’s time for the platform to mature past the stage of experimentation and help deliver solid business returns.
Patrick Gladney (@pgladney) is group head and director of research and insights at Social Media Group.