Facebook Advertising is Fool’s Gold

Last week, Michael Wolff at MIT’s Technology Review wrote a bearish piece on Facebook’s advertising model. The core of his argument is that Facebook doesn’t have the big idea to propel them into their $100B valuation:

What might Facebook’s big idea look like? Well, it does have all this data. The company knows so much about so many people that its executives are sure that the knowledge must have value.

Facebook ads aren’t quite working. GM even pulled their $10 million in annual spend. All their revenue growth to this point has been based on user growth.

But why are Facebook ads failing? For years now, advertisers have been shouting from the rooftops about how Facebook is this treasure trove of information about customers. They can’t wait to target their ads so perfectly that it’ll only be shown at exactly the right moment to the exact customer.

This generation of marketers have found fool’s gold: the idea that targeting your ads based the attributes of people will make them more likely to click and buy.

It’s fool’s gold because people don’t buy things because they are male, between the ages of 18 and 25, who work in technology. Those attributes are merely a correlation that says “in general, people with these attributes might buy our product.” It’s why a “great” click through rate in online advertising is less than 1%.

People don’t buy because of who they are, they buy because of circumstances in their lives, jobs that need to be done. The concept of Jobs to Be Done answers the question of “what are the circumstances where a customer is most likely to buy my product?”

The original example of this is the story of Milkshake Marketing, where a fast food company kept trying to improve milkshakes by making them appeal to demographic groups. But again, someone didn’t buy a milkshake because they were a woman between 35-45 with 3 kids. What researchers discovered was that people bought milkshakes as a breakfast replacement because it was entertaining during a long, boring commute, and would keep them full until lunch.

Facebook advertising doesn’t work because they focus on showing you ads based on who you are, not what problem you are trying to solve.

Ironically enough, Google is running around afraid of Facebook, but their ads have been better targeted all along because they are shown at a moment where one has a job that needs to be done.

Facebook is no better at advertising than ValueClick or any other online ad network. They just happen to be able to correlate their customers slightly better than everyone else. That’s not the formula for a $100 billion business, just click through rates closer to 1%.

May 29, 2012