"Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.
Today’s column is written by Nick Gibbons, global head of customer success at ReFUEL4.
Facebook once again beat its earnings forecast earlier this month.
But the share price dropped by almost 8% after the earnings call because Facebook’s CFO disclosed that its ad load was nearing maximum capacity, which would meaningfully affect revenue by mid-2017.
This is an important signal that all advertisers need to read into deeply.
Facebook won’t sell more space for ads, despite greater demand from advertisers. Facebook’s stance has always been to maintain the quality of content in the news feed, ensuring that most posts are from users’ friends or sources, which have been chosen. Ads are intrusive and kept to a minimum.
But if Facebook won’t sell more ads, how will that affect its ability to make money?
As Bloomberg’s Shira Ovide explained, Facebook has three options for increasing revenue. It can get more people to sign up for its properties or get existing users to spend more time on its sites. Both options would create more opportunities to show ads, leading to increased revenue.
Facebook can also boost its "ad load," which is the number of ads shown to each user per minute or hour on Facebook's digital hangouts. Revenue would also increase.
Finally, Facebook can charge higher prices for each ad, which would create additional revenue.
The focus has been on No. 1 and 2 in recent times. User growth and advertiser growth have been the rockets that propelled earnings higher and reinforced Facebook's position as an integral part of any digital marketer’s plans. But the signal is clear that ad load can no longer be increased.
In the near term, No. 3 will be the engine that drives revenue. However, Facebook will not just charge more. Facebook sells media via an auction. As demand from advertisers increases, there will be a commensurate increase in bids for the space. An example of this demand pressure is the seasonal increase in media demand from November to December as the retail season ramps up to climax at Christmas.
Advertisers will have to compete more aggressively in bidding in the auction for what media there is available. The space in the news feed becomes more premium, driving up CPMs.
For marketers, this early warning is opportune. It’s time to go back to the drawing board and redo the sums. It will never be more important to ensure that everything that can must be optimized to achieve expected returns on investment.
Facebook’s news feed is now the digital ad equivalent of the red carpet. Brands need to urgently rethink how to maximize those few seconds as a user thumbs past.
If they aren’t already, they must test before scaling; this is a no-brainer. If media is going to cost more, brands need to test, test and test again to get the creative right.
Targeting is an important lever but narrowing the focus too tightly could inadvertently raise media costs. Brands should first test using a broader audience before narrowing the focus.
Brands should also try different formats. Mixing videos with statics or using carousels can make a difference.
Finally, they must focus on ad quality. This is a key element as it can push a campaign’s performance up or down by many orders of magnitude. Ads that are stale, one-size-fits-all or single-format will all be penalized in this massively more competitive marketplace.
In this new world of limited news feed inventory in what is arguably the most valuable piece of internet advertising real estate, it is no longer business as usual. Marketers who value their jobs need to take note urgently.