Facebook Takes The Profit Out of CPM Buys

Chris Trayhorn
by Chris Trayhorn
May 5, 2010

Facebook made a big change in their advertising policies this week.

But they did it very quietly with a letter to display advertisers telling them that if you want Facebook traffic, you’d better be buying CPC.

The letter, sent out at the end of last week, told CPM advertisers that henceforth they, “will continue to receive impressions but may receive less clicks.”


And, “if your most important objective is to drive clicks on your ads, you should change your bids from CPM to CPC.”

Translation: if you’re a performance advertiser that has been running optimized display ads to drive cheap Facebook traffic, you’re going to need to pay more. Read on to read our analysis of what’s going on and for the link to the letter itself.

Here’s the deal. Facebook needs to make more money off its traffic. While they have overtaken Google in terms of US traffic, Google is making about 20x more revenue.

Why?

It’s because Google search users tend to already be in the buying funnel. They’re researching alternatives, or comparing prices or looking for reviews. Meanwhile, Facebook’s users are looking at pictures of their sister’s hot friends or are breeding chickens in Farmville. It’s almost a cliché these days, but true nonetheless: social media users are not easy to convert.

For Facebook this is a big problem. They’re taking a two-pronged approach to solving it.

First, they’re dissolving user privacy as fast as they think they can get away with, in order to maximize links with other sites and therefore the amount of user data that can be gathered. Take Facebook “Connections” as just one example. Until recently, your profile might have simply shown your hometown as San Francisco. Now that has been automatically turned into a “Connection” to the “San Francisco” page. The same goes for almost all of your personal profile data: it is now a set of Connections to Facebook community pages.

The kicker? All Connections are now deemed to be public information. And if you don’t want your hometown to be publicly available, then tough: all Connections are public, and no Connection means a blank spot in your profile.

If you haven’t read the Electronic Frontier Foundation’s analysis of Facebook’s new policy regarding Facebook Connections, you really should.

Facebook’s second revenue generating idea is where we began this article: they’re going to prioritize CPC ads over CPM. But wait, you say: wasn’t Facebook all about improving the user experience and delivering audiences to big brands? Not so much, it seems.

Facebook now has enough data from its advertising platform to be able to begin  to optimize its own ad mix. The fact that smart advertisers have been able to create CPM ads that generate enough clicks to convert much better than a CPC ad will not have gone unnoticed by Facebook’s analysts. They’re going to start wringing more profit out of their advertisers: CPM ads will get less traffic. CPC ads will become more competitive. Rates will rise.

As one advertiser said, “this is a HUGE deal since I am getting CPM clicks for about $0.40 by writing good ads, and CPC costs me almost double.”

So, the era of cheap Facebook traffic will slowly dwindle away. As with Google, the sheer volume of data gathered by Facebook means that they’re always going to be able to take most of the margin out of most arbitrage opportunities.

As we’ve seen time and time again over the last couple of years, in the ad network business, more data means more profit for those that own it.

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Chris Trayhorn

About Chris Trayhorn

Chris Trayhorn is the Founder & Editor of Revenue Performance magazine and the CEO of mThink LLC, a performance marketing services company based in San Francisco. Chris has worked on marketing campaigns with over 200 of the Forbes Global 2000. Friends say he knows a lot about a couple of things and a little bit about everything. He likes motorcycles, Manchester United and making pictures.

View all posts by Chris Trayhorn

4 Responses to “Facebook Takes The Profit Out of CPM Buys”

  1. Gunda Says:

    Most of the user who uses social networking are not interested on clicking ads. They are here to whether to connect with there friends or family or to watch hot pictures and play games. As there are millions of social network user, but the revenue collect by them is comparatively low and not much more effective. As the price of ad in social networking (basically Facebook)is getting higher as well as it is not too effective for e-commerce who provides fulfillment services. The huge traffic are not converting and the company are not getting return on investment. It’s time to think alternate way of converting the user.

  2. shanelee Says:

    Facebook now a days have become one of the most useful ways of communicating among the people. Social media tools now play a key role in keeping consumers connected. It became a way for people to bring their social lives to a better place. Thanks.

  3. sahi Says:

    The fact that smart advertisers have been able to create ads that generate clicks CPM enough to make much better than a CPC ad will not go unnoticed by analysts Facebook. They will start to enjoy more of their twisted advertisers recession proof business.

  4. hikasa Says:

    The information that elegant advertisers encompass been intelligent to generate ads.