How exactly does Facebook make money anyway?
Facebook says it does not use everything it knows about you to sell ads; for example the data about what you like, comment on or post in your News Feed does not help it target ads at you. It relies mainly on the profile data you provide and the pages you like to learn what your name is, where you are from and what you do for a living. It also uses location tracking to understand your offline travels, and web-trackers such as the Facebook pixel across millions of websites to figure out where you go and what you do online. In that way, it's much the same as Google's ad business.
But what Facebook has that Google doesn't is the social graph. Google knows what a person who it thinks is you does online. Facebook, however, doesn't just know your name and what you do on the internet, it knows your friends and family and can figure out if there are things your social network is interested in that might also apply to you.
For advertisers, buying Facebook ads is as much art as it is science. But how much Facebook's ads cost in practice is one of the most mysterious elements of its business.
Outside agencies such as AdEspresso have tried to peg Facebook's cost per clicks, suggesting that in Canada it works out to 20 cents per click, versus 27 cents per click in the United States. But there are many factors that could impact the cost versus value of a Facebook ad, such as: the region targeted, the size of the targeted audience, advertiser competition for that same audience, length and format of a campaign, the information used to target, and of course the type of ad (text, image or video).
"It's impossible to guess or determine what something will cost ahead of time. We might see that a specific audience we're targeting is generating leads [a catch-all phrase for a user responding to a Facebook ad] at $5 while another is generating leads at $35 dollars," says Marc Levesque, co-founder of WebRunner, a small digital-marketing agency in Montreal that specializes in social advertising. "Impressions and clicks can be anywhere from a couple pennies up to tens of dollars. Our goal is always to optimize on whatever is driving the lowest CPA [cost per action]. It's really an iterative, rinse & repeat kind of process."
For some audiences, those costs can reach thousands, according to Brian Wieser, senior analyst with Pivotal Research Group. But with Facebook, high costs aren't always a sign of a broken marketplace, according to Monica Peart, analyst with eMarketer. "For some advertisers, costs may be high, but then ROI could be high as well, often yielding profitability. This means an advertiser may still find it worthwhile to increase or sustain advertising spend with Facebook even with what may be characterized as 'high costs' by the rest of their industry."
What's not mysterious is that Facebook's average revenue per user keeps going up: In Canada and the United States, it collects $21.20 per user, and according to recent filings with the SEC its global ARPU topped $5 for the first time in the third quarter of 2017.
Trump campaign digital strategy mastermind Brad Parscale has gone on TV and described how he would automatically generate and test thousands of different ads every day, changing things as small as the colour of the "donate" button to try and get a response, and then each time a user gave him a positive signal that data was added to the profile (essentially, "this bucket of users may like Green Donate buttons; let's set up a program that only ever targets them with green buttons"). His operation spent close to $100-million dollars, but pulled in $240-million in small online donations, and may have played a role in swing states; in a 60 Minutes interview Mr. Parscale said that rust-belt voters responded very favourably to ads featuring crumbling infrastructure and promises by Mr. Trump to make America's roads and bridges great again
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