Facebook’s fortunes depend on data

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Data will be the key to Facebook’s financial future, especially in light of its expected stock market flotation. Perhaps that was never in doubt, but research released in the past week has underlined it emphatically.

First came the story that Facebook charges a 29% lower cost per click for ads that keep traffic on the site. That is according to analysis by agency TBG Digital of 2.8 billion ad impressions on the social network.

Keeping traffic on Facebook is “a big part of the algorithm” designed by the site to calculate what advertisers are charged, according to TBG chief executive Simon Mansell. This sounds like common sense, but it is doubly important given what else we have learned this week.

Facebook has stopped growing in developed markets, where it is now losing users, according to the Inside Facebook blog. In the US in May alone it lost 6 million. If it has in fact reached saturation in countries like the US, the UK and Canada, that means the potential audience for advertisers in those territories is not going to get any bigger.

Obviously there are many markets where Facebook is still expanding rapidly. But if they all follow the same pattern, then the site will not be able to rely forever on its growing reach to drive its advertising revenues. It will need to rely on relevance and engagement instead, and this is why data will be crucial.

The auspices are good for Facebook in this respect, given separate research that has been done on its Sponsored Stories ad format. These ads incorporate a social context based on data shared by a user’s Facebook friends about the things they like.

Another piece of TBG research last month found that Sponsored Stories have a 46% higher click-through rate than normal ads. Nielsen, meanwhile, has found that people are 68% more likely to remember a social ad and twice as likely to remember the message, while digital agency Essence has claimed their cost per click is 10% lower.

As growth in the user base grinds to a halt in rich countries, Facebook will need to focus on getting users to spend longer on the site. It is doing this with ads that attempt to spark interest with social context created via user data, and that link to relevant branded content on Facebook itself.

Other sites will catch up on these techniques, though. Facebook will need to keep innovating if brands are to keep seeing the same number of impressions and click-throughs that they currently do. With a public share offering expected in the coming year, this will be increasingly important for Facebook’s fortunes.

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