PALO ALTO, Calif. -- This is a story about advertising on the web. Specifically, it's about ads on Facebook, a hugely popular free service that's supported solely through advertising, yet is packed with users who are actively hostile to the idea of being marketed to on their cherished social network. Considering all of this, the best place to start is with your primary concern about web ads. This is what I hear from readers every time I write about the online ad economy, especially ads on Facebook: "I don't know how Facebook will ever make any money -- I never click on web ads!"
And that's not all. You've checked with your friends and relatives. No one you know has ever intentionally clicked on a web ad.
So, the question persists: How does Facebook expect to become a huge business if most people you know never click on ads?
The answer is surprisingly obvious. It's a fact well-known to advertisers, though it's not always appreciated by people who use Facebook or even by folks in the web ad business: Clicks don't matter. Whether you know it or not -- even if you consider yourself skeptical of marketing -- the ads you see on Facebook are working. Sponsored messages in your feed are changing your behaviour -- they're getting you and your friends to buy certain products instead of others, and that's happening despite the fact that you're not clicking, and even if you think you're ignoring the ads.
This isn't conjecture. It's science. It's based on a remarkable set of in-depth studies that Facebook has conducted to show whether and how its users respond to ads on the site. The studies demonstrate that Facebook ads influence purchases and that clicks don't matter. They also shed light on Facebook's long-term business strategy. The tech world is consumed by the war between Facebook and Google -- two huge sites that are constantly battling one another for users, engineers and advertising clients. Yet Facebook's studies suggest that its advertising fortune won't necessarily come at the expense of Google. Instead, the findings show that people react to ads on Facebook in the same way they respond to ads on television. If Facebook's ad business takes off, it might be at the expense of the biggest ad-supported medium in the world.
Last year, Facebook partnered with Datalogix, a firm that records the purchasing patterns of more than 100 million American households. When you stop by the supermarket to buy Tide, Rice-A-Roni and Mountain Dew this evening, there's a good chance you'll hand the cashier a loyalty card to get a discount on your items. That card ties your identity to your purchases -- it puts a name on your Tide, Rice-A-Roni and Mountain Dew. After you leave the store, your sales data is sent over to a server maintained by Datalogix, which has agreements with hundreds of major retailers to procure such data.
Over the past few months, Facebook and Datalogix figured out a way to match their data sets in a manner that maintains people's privacy. In other words, Facebook can now tie its users to the stuff they buy at supermarkets. Armed with this data, Facebook began running a series of analyses into the effects of advertising campaigns on its site. If, say, Procter & Gamble ran a Facebook ad for Tide, Facebook could look at Datalogix's data to see whether people who were exposed to the ad tended to purchase more Tide in the weeks after the campaign.
These general insights make a strong case for Facebook ads. First, according to the study, Facebook ads work. "Of the first 60 campaigns we looked at, 70 per cent had a 3X or better return-on-investment -- that means that 70 per cent of advertisers got back three times as many dollars in purchases as they spent on ads," says Sean Bruich, Facebook's head of measurement platforms and standards. What's more, half of the campaigns showed a 5X return -- advertisers got back five times what they spent on Facebook ads.
But the most interesting finding was the total lack of correlation between purchases and clicks. "On average, if you look at people who saw an ad on Facebook and later bought a product, (fewer than) one per cent had clicked on the ad," Bruich says. In other words, the click doesn't matter; people who click on ads aren't necessarily buying, and people who are buying are almost certainly not clicking.