Facebook: Not $$$ocial Enough?

Earlier this week General Motors decided to stop advertising on Facebook. GM made this announcement “after deciding that paid ads on the site have little impact on consumers’ car purchases” according to the Wall Street Journal (“GM Says Facebook Ads Don’t Pay Off”). Albeit, the total amount, $10 million, is but a tiny fraction of Facebook’s whopping $3.15 billion in reported 2011 ad revenues, the timing was not great. It was less than one week before Facebook’s much vaunted IPO.

So while the revenue loss is paltry, there are two larger concerns for Facebook. One, GM is the third largest advertiser in the US and their announcement might lead other advertisers to re-evaluate their advertising spend on Facebook. The second more worrying thing is that it is a major blow for a young company trying to convince the world that “social advertising” is not only effective but provides Return on Investment (ROI). In the short-term the impact may not be that great simply because Facebook is about to reach 1 billion active users (approximately 14% of the world’s population); and this number alone is hard for most advertisers to ignore. But as a public company, with shareholders, they will soon need to prove that they are worth their high valuation, in revenue terms.

Every company feels compelled to have a social advertising budget, even though there is scant evidence that these dollars generate any sales, or return on investment. The advertising and social marketing industry will have you believe they are effective sales drivers but the reality is that there are few independent studies or evidence to support this hypothesis. If you think about the number of times you have clicked on a Facebook ad or decided to make a purchase based on seeing someone’s status update (or wall post), you will likely reach the same conclusion. Facebook’s ad revenue actually fell in the first quarter of 2012 from the fourth quarter of 2011.

Here is something to ponder about Facebook’s current IPO valuation. According to Anant Sundaram (of Tuck School of Business at Dartmouth) the average price to earnings ratio for the majority of US companies, over the last one hundred years, has been around 15. Apple is at 15 and Google is apparently a little bit higher. However, Facebook’s price-to-earnings ratio is 100.

He goes on to say that “at current levels, it would take Facebook 100 years to generate enough profits to pay for itself. That number is so high because investors are betting Facebook’s profits are going to explode. Sundaram says, judging from this price these investors seem to believe that the company’s profits will double, and then double again, and then double again — all within the next few years. For that to happen, Facebook will need to attract 10 percent of all advertising dollars spent on the planet “across all media – print, billboards, radio, television, Internet.”  To put this in perspective he adds that “Facebook had just over $3 billion in global ad sales. TV ad sales in the U.S. alone last year were $68 billion.” (NPR: “Is Facebook Worth $100 Billion?”).

Facebook recently tried a new revenue generation experiment in New Zealand by charging people two New Zealand dollars (US$1.53) a post to ensure that their own friends see what they write (Wall Street Journal: “Facebook Gets Religion for Revenue”). Are your status updates and posts on Facebook valuable enough to start paying to share it with your friends? I know mine are not and never will be.

Let’s just say I am holding off buying Facebook shares because I don’t believe they have a real revenue model, yet. That is not say that they will not find a Google like search cash cow but let’s just say ad banners on the site are not the Holy Grail that Mark Zuckerberg wants us to believe.

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To LIKE or not to LIKE…

There seems to something akin to a marketing frenzy to build Facebook LIKE’S among companies. Almost every second email I get relates to a contest that is trying to entice me with a $xxx,xxx prize or a dream vacation. However, when I excitedly click on the entry link it frustratingly forces me to LIKE the product in order to enter the contest.

Sure, it will help you drive up the number of Facebook LIKES on your fan page in the short-term but what is the real and long-term value of this? I get that there are many statistics out there about how conversion and engagement is much higher on Twitter and Facebook and social media is all the frenzy in marketing today but for a moment let’s break down the psychology of most of these contests.

I am not saying all contests are the same and therefore not valuable but am merely talking about the recent frenzy where the prizes have no bearing or relevance to the company, or product, and the contest itself does nothing to build customer engagement with the brand. Most importantly when you throw the kitchen sink by emailing people randomly, it becomes akin to a marketing bribe where in order to receive a LIKE; rather than trying to target a relevant audience and do it on the merits of your brand or product story.

The simplest way to think about – imagine walking down the street one day you decide you want to make 100 new friends that evening. You could simply stop every person you see and offer to pay for their dinner at a really fancy restaurant, like Per Se. I have no doubt you would end up with 100 new “friends” very quickly, and without too much effort. Now what are the odds that any one of these 100 people will actually ever have anything to do with you again or be there in a pinch? Versus building real friendships through time, common interests and all the other real and meaningful stuff.

This is what these almost daily contest emails have become for most of these brands. Everyone from airlines to tampon makers have sent me emails, to enter contests, but only after I LIKE them on Facebook. Ninety percent of them have no relevance to me, my purchase history or my interests. It seems all these so called social media agencies are throwing the kitchen sink to drive up campaign success metrics, which frankly are of little value for the brand. Because even if the grand prize for a tampon product was so amazing that I decided to LIKE it to simply be eligible to enter, I am never going to purchase that product of have any future interaction of engagement with the brand.

Social media done right is about building long-term relationships, kind of the way we build friendships in the real world; and it is hard work.

So the next time you want to increase your fan page LIKES on Facebook, remember that 10 truly engaged customers will not only spend much more money on your products, consistently, over the long-term but also are more likely to become evangelists for your brand. Their value alone will be greater than the 1000+ LIKES you may add of people who don’t even know what your company makes.

Groupon: To Deal or Not to Deal?

I struggle to see a viable business model behind this much publicized company that is about to jump on the current tech IPO bandwagon.

I can see some short-term value for membership based business’s like Costco or Zip Car using a 30%-50% discount on the first year membership fee to attract new customers. Businesses like these will make up more than the discount value in subsequent sales, as someone buying the coupon is obviously interested in what they offer. I will also say that there may be some intermittent value for local businesses that are more indulgences than necessities, like a river cruise with dinner that people would not consider spending on without the 50%-70% discount.

BUT for pretty much every other type of local business like restaurants, clothing retailers, supermarkets, etc. I see absolutely no value in offering a 50%+ discount to attract new customers; and more so doing this repeatedly.

Additionally, I have read upwards of 70% of businesses (I know at least two first hand) that have used Groupon, swear they will never use it again. Groupon denies this and does not share any of its figures. Whether Groupon is lying or not (we will not know until after the IPO) there still remain many fundamental flaws with their model:

– There are no barriers to entry into the daily deal market; and the number of competitors is growing with Facebook and Google the latest entrants. Basically, all you need is a sales force

– There is also nothing unique or special about Groupon or its relationships that creates or incentivizes loyalty from its customers

– Groupon terms are also supposedly far from endearing: “Each time Groupon sells a voucher to users, it collects cash up-front. Merchants’ share of the proceeds, which averages about 60% world-wide, is remitted later—sometimes much later. In North America, merchants get paid in installments over 60 days. Internationally, it typically takes 70 days.” Seems Living Social pays within 15 days and Google says they will pay within 4 days. (WSJ: http://on.wsj.com/oO2XdQ).

Beyond these issues I also don’t see why any business would discount their product or service repeatedly because it very quickly devalues their brand and will erode forever any premium people were willing to pay for it.

Finally, I also have serious ethical issues with the company. Aside from how quickly they threw their agency under the bus after the Super Bowl ad debacle, it turns out there has been a lot of insider selling going on. The owners have taken out $870 million so far from the $1 billion they raised. Odd given that the company lost $150 million last quarter and needs lots of cash to compete and stay ahead of its rapidly growing list of competitors. (Read the article @Business Insider)

My take: Groupon is smoke, mirrors and hype. This is why they had no choice but to turn down Google’s $6 billion offer, and also the reason their insiders are cashing out now, ahead of the public scrutiny an IPO will bring.

@AmericanExpress – Innovate or Die…not Quite!

Many companies feel overwhelmed by the need to constantly innovate, in an age where the next new and improved, ground breaking or revolutionary product seems to have become the norm. True innovation requires thinking out-of-the-box, taking risks and not being afraid to fail, often.

However, there are two things I tell clients; first, that the word innovation has taken on numerous dimensions that maybe did not fully exist prior to this digital age. A company can be considered innovative if it manages to find a new revenue stream or new use for an existing product; it does not have to come up with a “new” product or service each time.

Secondly, truly innovative companies are one’s who constantly watch cultural trends and adapt and evolve their existing strategies, products and services to take advantage of them. A great example is America Express. Rather than fall into the trap of launching new or improved products all the time, they re-shape their existing ones to keep pace with changing behavior.

Amex recently re-branded their long running Membership Rewards Program as the New Social Currency; tapping directly into the growing global social commerce trend. While it is a masterstroke, companies too often fail to follow-thru on brilliant ideas like this – which means that in the end many such initiatives resemble hollow, smoke filled efforts that simply re-brand with no real substance behind it.

Not Amex; which is what makes them such a formidable and admired brand. On the heels of this re-branding (of their rewards program) they made three announcements that provide the substance and follow through needed to make it real to their customers:

  1. Use your Amex Rewards to pay for purchases on Amazon
  2. Foursquare check-in’s now provide access to special discounts and Amex rewards, at certain retail locations
  3. Yesterday, they announced that their OPEN small business card members can use rewards points to buy and pay for ads on Facebook

Innovation – absolutely! In one fell swoop not only did they re-energize their rewards program by making it more valuable for existing card members, but also tapped into the heart of a younger generation, filled with future card members.