Facebook IPO and beyond, MIT Sloan expert sees rich new revenue source

Research finds “huge untapped potential” in social advertising

CAMBRIDGE, Mass., February 1, 2012—With Facebook’s initial public offering this week, the social networking giant can look ahead to a potentially huge new source of revenue from “social advertising,” according to new research by MIT Sloan School of Management Associate Professor of Marketing Catherine Tucker. Tucker says that Facebook itself is only beginning to recognize the “untapped potential” of this kind of advertising fueled by its own technology.

Tucker’s research counters the prevailing view of recent years that social network websites are unfruitful venues for paid advertising. Instead, she finds that social advertising has been under-valued and underrated as a revenue stream and as an effective way to deliver messages, though only if those messages are delivered the right way.

“Facebook has only recently figured out what is unique about all the data they collect,” says Tucker. “Facebook knows who peoples’ friends are, which can be hugely valuable to marketers. Feeding that social network into the Facebook algorithm creates huge and under-exploited profit potential.”

In social advertising, marketers use online social relationships to target and improve their ads. For her new research paper, Tucker examined data from an experiment in which a nonprofit charity used both traditional and social advertising on Facebook. Tucker found that the social ads, which were targeted to friends of `fans' of the nonprofit on Facebook, attracted far more clicks than those that were not. “When you target ads based on who is friends with whom, you can double the number of click,” she says. “This is because advertisers can uncover consumers who could also get excited about their product.”

“Social advertising is not necessarily replacing display advertising,” adds Tucker. “Rather, it is a different and more effective form of targeted advertising that still remains unrefined, even on Facebook.” So far, Facebook’s algorithm appears to treat all Facebook friends equally, Tucker explains. “But among your friends, certain people have more influence; they are the `gatekeepers’ whom you tend to follow more closely. When Facebook refines its algorithm to incorporate such gatekeepers as part of social advertising, we will see ever greater improvements in advertising response.”

But Facebook must be careful about how it uses such powerful information, Tucker cautions.“There is a level of intrusiveness that no advertiser should cross. Advertisers must avoid being overt in their attempts to exploit social networks in their advertising. If Facebook too explicitly takes advantage of your friend, it could cross that line.” For example, in her study she finds that an ad that states explicitly, “Be like your friend” deters users, who could resent that Facebook or any other company is openly commercializing friendship. But if the consumer is simply informed that “Susan likes this,” it is not seen as a personal intrusion. “Speculatively, the results suggest that intrusive or highly personal advertising is more acceptable if done algorithmically by a faceless entity such as a computer than when it is the result of evident human agency,” Tucker writes.

These are the kinds of issues with which Facebook itself is grappling as it gets more deeply into social advertising. “Facebook is not giving much guidance to advertisers about how to use this new technology, partly because it is so new. But the results of my research suggest that social networks will be able to exploit their unique data on who is friends with whom to enlarge their share of advertising dollars.