If Facebook Ads Don't Work, Why Do So Many Companies Keep Buying Them?

The old joke about buying advertising was that you knew that half your money was wasted, you just didn’t know which half. On the interwebs that was all going to change. We would have a panacea for marketers, where everything could be measured. Thus companies would spend marketing dollars more effectively, and savings would be passed on to consumers, and little baby kittens dressed in adorable costumes would gently fall from the heavens in miniature hot air balloons, delivering delicious ice cream bars to your door.

Or something like that.

Anyway, the magic hasn’t happened, at least not on Facebook, according to Nate Elliott, an analyst at Forrester Research. Elliott just put out a new report and penned a controversial open letter to Facebook CEO Mark Zuckerberg that starts off with a blunt and almost hostile claim: “Facebook is failing marketers.”

Elliott’s claim was based on a survey of 395 marketers in the U.S., U.K. and Canada. Those people rated Facebook the least effective of 13 marketing channels and basically said they're not getting a lot of bang for their buck. 

It's a big report but the executive summary is this: Not enough engagement, and display ads aren’t targeted well enough. People kvetched that “Facebook’s display ads were significantly less effective than the display ads they buy elsewhere online,” Elliot writes.

Here’s a chart from the open letter:

Is the Report Unfair?

Business Insider called it a “brutal” report, especially Forrester’s recommendation to marketers: “Don’t dedicate a paid ad budget to Facebook.”

Elliott’s report also says that Facebook is so big and so powerful that it doesn’t see any need to change, as “its enormous revenues have blinded it to marketers’ growing dissatisfaction.” There’s also a prediction: “The smart money will leave Facebook.”

Basically, Forrester is saying that some percentage, perhaps a big percentage, of what you spend on Facebook is wasted. Sounds like the old days. The story got picked up all over the place, from BusinessWeek to CNET to Marketwatch.

The Backlash

Facebook quickly fired back, calling the report “illogical” and “irresponsible.” Facebook says that advertising on its platform is super effective, which is why more than 1 million companies are buying ads there.

That was only the beginning, as loads of people came rushing out of everywhere to defend Facebook. Some pionted out that Facebook's score was barely below all the other platforms, and given the margin of error, the scores might be meaningless. (On the other hand, you might argue that, given Facebook's size and stature, it should have scored way above all the others.)

Social Media Today said Forrester made some good points but overall had “missed the mark.” The Next Web called into question the methodology used, arguing that the “report is vague with a small sample.” Marketing Land called the report a raw publicity stunt, and a well-timed one, published the day before Facebook was due to release its earnings for the September quarter.

Rob Leathern, CEO of Optimal, a social media marketing company, says Facebook isn’t failing marketers but Forrester is, with a report that he calls “BS.” VentureBeat critiqued the report, ran a photo of a guy with the word “Stupid” on his head (subtle!), and quoted an executive from Nanigans, which runs an ad platform on Facebook, saying Nanigans has data to prove that Facebook ads are super-duper effective.

True Believers?

Take note that some of the critics are people whose business is based on selling ads on Facebook. But maybe they’re right, and the Forrester report is a fiasco. A level-headed analyst friend of mine, who asked to remain nameless, says Elliott has a point when he complains that Facebook could be doing more than just selling display ads. But on the other hand, display ads represent a comfort zone for marketers. It’s what they know, and what they want.

Facebook is a strange brand. It evokes a really strong emotional response from marketers, advertisers, and users alike. How do you explain the fact that the company has the largest audience on earth, with more than 1 billion members, yet is consistently rated as a brand that people really don’t like?

Facebook ranked 81st in a new survey of the most-loved brands in the world. In a survey from last year, Facebook was rated the second-most-hated brand in the world, beating out Verizon, the Miami Heat, and the Catholic Church ... and that’s saying something.

Advertisers seem to like Facebook well enough, which makes sense given the fact that Facebook at every turn has sided with advertisers instead of regular users. But keep in mind that advertisers are the second-most-hated group on the internet, second only to hackers and criminals. So Facebook is loved by the one group (advertisers) that is hated by everyone else. And the same people who hate advertisers also hate Facebook, so maybe the whole thing kind of makes sense.

Does Money Equal Love?

One of the arguments used to rebut the Forrester report (in fact it’s part of Facebook’s own defense) is that if Facebook's ads are so ineffective, why do people keep buying them? Thus Facebook’s continued growth and financial success is set forth as proof that advertising on Facebook is an effective way to find customers.

Maybe. Certainly the financials look good. For the September quarter, Facebook reported revenues of $2 billion, an increase of 60% from the same period a year ago. Net income was $425 million compared to a loss of $59 million last year. Annual sales for 2013 are projected to be $7.4 billion, up from $5.1 billion in 2012. Shares were trading at $56 at the time of this writing, their all-time high.

All well and good. But does this prove that the ads work, and that you should be pouring your ad budget into Facebook? Or does it just that Facebook is so big that advertisers feel they can’t ignore it, and/or that while buying ads on Facebook may not be incredibly effective, it’s still easier to buy ads from the one big 800-pound gorilla than to go spreading your dollars all over the place looking for little niches?

In the latter scenario, you might get a bit more bang for each buck, but that gain would be more than offset by the overhead and headache of managing all that extra complexity. It's easier (better?) to just buy ads on Facebook and pray. Or cross your fingers.

The Future

But is this sustainable? My sense is that (a) ads work sometimes, but less so today than in days gone by, and that their effectiveness will continue to decrease over time; but (b) the advertising industry is like a giant and complicated machine, with lots of moving parts, and it can’t just be switched off all at once, so instead it just keeps chugging on; which means (c) every year there are billions of dollars set aside for advertising, and brands have to spend that money someplace; and (d) maybe what we’re seeing in the growth of Facebook is just dollars flowing from old buckets to a new one.

But over time, the inefficacy of advertising should become more and more apparent. If that happens, budgets will get pared back. Nevertheless, for a time, online properties will keep growing simply by catching dollars flowing out of old media.

Online media platforms might also improve their ability to target ads, and thus make their product better. But I doubt those improvements will not be enough to overcome the primary problem with advertising, which is that everyone hates it.

People hate advertising so much that they will go to great lengths to avoid it. They hate it so much that an entire industry has sprung up to help people get away from ads.

Why does any company want to be in the business of selling something that people hate, and that keeps working less and less well? Facebook (and Twitter and all the others) are doing this not because they think it's a great business model, but because ad money is like crack. It’s a fast, easy hit. Long term it might not make sense, but Facebook has short-term needs; it must answer to Wall Street.

Maybe Facebook’s plan is to wring as much money out of advertising while trying to invent a more sustainable business model. And maybe that will happen. For Facebook's sake, and for ours, I hope so.