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Tag: Facebook marketing

Facebook Ads: too high performance might turn on you (theoretically)

Introduction

Now, earlier I wrote a post arguing that Facebook has an incentive to lower the CPC of well-targeting advertisers because better targeting improves user experience (in two-sided market terms, relevance through more precise targeting reduces the negative indirect network effects perceived by ad targets). You can read that post here.

However, consider the point from another perspective: the well-targeting advertiser is making rents (excessive profits) from their advertising which Facebook wants and as the platform owner is able to capture.

In this scenario, Facebook has an incentive to actually increase the CPC of a well-targeting advertiser until the advertiser’s marginal profit is aligned with marginal cost. In such a case, it would still make sense for the advertiser to continue investing (so the user experience remains satisfactory), but Facebook’s profit would be increased by the magnitude of the advertiser’s rent.

Problem of private information

This would require that Facebook be aware of the profit function of its advertisers which as for now might be private information to the advertisers. But had Facebook this information, it could consider it in the click-price calculation. Now, obviously that would violate the “objective” nature of Facebook’s VCG ad auction — it’s currently set to consider maximum CPC and ad performance (negative feedback, CTR, but not profit as far as I know). However, advertisers would not be able to monitor the use of their profit function because the precise ad auctions are carried out in a black box (i.e., asymmetric information). Thus, the scenario represents a type of moral hazard for Facebook – a potential risk the advertisers may not be aware of.

Origin of the idea

This idea I actually got from one of my students who said that “oh, I don’t think micro-targeting is useful“. Then I asked why and he said “because Facebook is probably charging too much from it”. I said to him that’s not the case, but also that it could be and the idea is interesting. Here I just elaborated it a bit further.

Also read this article about micro-targeting.

Micro-targeting is super interesting for B2B and personal branding (e.g., job seeking).

Another related point, that might interest you Jim (in case you’re reading this :), is the action of distributing profitable keywords by the platform owner between advertisers in search advertising. For example, Google could control impression share so that each advertiser would receive a satisfactory (given their profit function) portion of traffic WHILE optimizing its own return.

Conclusion

This idea is not well-developed though; it rests on the notion that there is heterogeneity in advertisers’ willingness to pay (arising e.g., from different in margins, average order values, operational efficiency or such) that would benefit the platform owner; I suspect it could be the case that the second-price auction anyway considers this as long as advertisers are bidding truthfully, in which case there’s no need for such “manipulation” by Google as the prices are always set to maximum anyway. So, just a random idea at this point.

Facebook ad testing: is more ads better?

Yellow ad, red ad… Does it matter in the end?

Introduction

I used to think differently about creating ad variations, but having tested both methods I’ve changed my mind. Read the explanation below.

There are two alternative approaches to ad testing:

  1. “Qwaya” method* — you create some base elements (headlines, copy texts, pictures), out of which a tool will create up to hundreds of ad variations
  2. “Careful advertiser” method — you create hand-crafted creatives, maybe three (version A, B, C) which you test against one another.

In both cases, you are able to calculate performance differences between ad versions and choose the winning design. The rationale in the first method is that it “covers more ground”, i.e. comes up with such variations that we wouldn’t have tried otherwise (due to lack of time or other reasons).

Failure of large search space

I used to advocate the first method, but it has three major downsides:

  1. it requires a lot more data to come up with statistical significance
  2. false positives may emerge in the process, and
  3. lack of internal coherence is likely to arise, due to inconsistency among creative elements (e.g., mismatch between copy text and image which may result in awkward messages).

Clearly though, the human must generate enough variation in his ad versions if he seeks a globally optimal solution. This can be done by a) making drastically different (e.g., humor vs. informativeness) as oppose to incrementally different ad versions, and b) covering extremes on different creative dimensions (e.g., humor: subtle/radical  informativeness: all benefits/main benefit).

Conclusion

Overall, this argument is an example of how marketing automation may not always be the best way to go! And as a corollary, the creative work done by humans is hard to replace by machines when seeking optimal creative solutions.

*Named after the Swedish Facebook advertising tool Qwaya which uses this feature as one of their selling points.