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Advertisers begin by opening an account, identifying their goals, and determining which target audiences they want to see their ad. Then they create the ad and use an auction-based system to set a maximum bid–the highest amount they are willing to pay either each time someone clicks on the ad or each time the ad is displayed 1,000 times. Facebook’s reporting tool lets advertisers track clicks, impressions, and the demographics of people clicking on the ads, among other metrics.

The key difference between these ads and the dozens of other ways to place advertising online is the precision of the targeting. While other systems might guess on the basis of past behavior or inferred connections, Facebook knows.

The second key difference: social context. Facebook has found, through research done with Nielsen, that ads that mention friends (such as “John Doe likes Toyota”) perform better. People are more likely to notice them, remember them, and plan to buy the advertised product.

For example, appliance marketer Subzero/Wolf Appliance delivered ads to the Facebook friends of consumers who had already connected to the brand’s Facebook page. The ads, which led new visitors to that page, resulted in a 500 percent increase in the number of people who volunteered to connect to it by “liking” the brand. As of September, more than 113,000 people had done so.

Among the biggest buyers of Facebook’s self-serve ads are social-game companies such as Zynga, which typically flood the social network with promotions when they launch a new game. A midsize to large game developer will spend an average of $500,000 on Facebook advertising during launch month alone, says AdParlor’s Fazal.

Facebook still has a way to go before truly perfecting its self-service ad system. Sometimes, for instance, married people will see ads for dating services. Even Kendall admits that the targeting could be more accurate. “I think that has improved drastically over time, but it’s not an easy problem and it’s something that we’re still trying to get right,” he says.

Still, these are relatively early days for social-media advertising, and Facebook’s rapid ad-revenue growth attests that its model is certainly working well enough for some companies. The $1.3 billion estimate for ad sales this year is up from an estimated $665 million in 2009. (Facebook also has an additional, but much smaller, revenue stream from commissions on credits spent on social games.)

So far, advertisers can use the self-serve system only to buy ads that appear on Facebook. But as the social-media giant expands its footprint across the Web and into the mobile realm, third-party publishers and businesses will have more ways to link with Facebook, and I believe the ad platform will expand beyond Facebook’s walls as well–just as Google’s AdSense program has.

Meanwhile, the process of planning and buying the advertising is becoming almost completely automated. Algorithms allow buyers to create, test, and launch thousands of iterations of Facebook campaigns on the fly, changing their targeting choices to see what works best. As more marketers get comfortable with using technology to optimize their advertising, the model will spread to other forms of media, says Joe Mele, managing director for media and marketing at the digital agency Razorfish. “Soon,” he says, “we’re going to start seeing remnant [ad] inventory on television and other media being automated, instead of people taking orders.”

Debra Aho Williamson is a senior analyst covering social-media marketing at eMarketer (www.emarketer.com).

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Credit: eMarketer

Tagged: Business, Business Impact, Facebook, digital marketing, Zynga

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