Social media maturation and further industry implications

This whitepaper, written by Will Ashton, managing director of Alchemy Social, explores maturing social media models and how this affects the Facebook advertising industry.

How mediums matureWhen growth in demand for a medium begins to surpass growth in users of that medium it begins to mature. As television advertising matured in the 1960’s ads went from being radio style testimonials with visuals to the entertaining sketch styled ads that are still the best way to use the medium. This is the best way to advertise on that medium since the purpose of the medium is to entertain. When ads entertain, viewers react better to them since that is what they expect. Something similar happened to print advertising, matured ads were visually more enticing. When radio matured, ads became more informative. More recently when search matured, the landing pages of ads became more relevant to the users search terms. The same trend exhibits itself in each case, and the best advertising strategy is always to align ads to the medium itself. The main driver of these changes is the cost of advertising inputs (airtime, production cost etc.). Once ROI is no longer easy to achieve advertisers are forced to adapt or face higher output (sales, fans etc.) costs. In order to run effective ads, advertisers have to consider the full cycle associated with their ads. This sort of approach usually introduces one or more mid-cycle (or transitional) outputs and this is when we begin to speak of things like memorability (TV) and relevance (search).The cost of social advertising inputs - Impressions and Clicks - can be shown to be increasing as a result of increased demand and a slowdown in supply growth. As such ROI is becoming more difficult to achieve each period. Consequently advertisers now have to consider the effectiveness of the entire cycle of each ad they post and not just the click through rate associated with a particular image, copy or target audience.Social demand now outweighs supplyDemand for Social Advertising is growing at more than 100% per annum as more brands begin to recognise the added value of targeting and customer engagement. This increased demand drives the price of social advertising inputs up.

The growth in social media's share of total online ad spend from 2006 to 2010

The growth of social media users is beginning to plateau and take on a more organic gradient. The market has now entered a phase where there is no longer any super-growth in user numbers to dilute the increases in cost caused by demand increases. As such we expect input cost to increase at rates substantially higher than those we have seen previously.

The growth of Facebook users since 2004

Input cost trends also indicate a mature mediumBy analysing three different tranches of social media campaign types over H2 2011 we are able to illustrate the above coming into effect with remarkable observations with regard to timing. We categorise our tranches on the basis of cycle length and define each tranche as follows.
  • “Short Cycle”: a social campaign whose cycle begins with an impression and ends with a click
  • “Medium Cycle”: a social campaign whose cycle begins with an impression followed by a click and ends with an onsite conversion or registration
  • “Long Cycle”: a social campaign whose cycle begins with an impression followed by a click and ends with an offsite conversion, registration or purchase
Since impressions are the only input for short cycle ads we would expect to see a very stable and low CPM for these ads, this is due mainly to the simplified approach used with regards to targeting. At the beginning of Q4 we saw the CPM of medium cycle ads fall under the CPM of long cycle ads. Interestingly medium cycle CPM began to decrease immediately after the launch of Custom Edges in September, the rate of increase of long cycle CPM also began to rise at this point. Overall CPM increased by 11.4%.

2011 H2 CPM

The rate of increase of medium cycle CPC began to slow immediately after the F8 Summit and launch of custom edges, at the same time long cycle CPC began to rise sharply. The point at which medium cycle CPC fell below long cycle CPC coincides with the launch of Timeline, which is the point at the full scope of custom edges realised full usability. The steep increases in long cycle CPC drove Overall CPC up by 55.1%.

2011 H2 CPC

As expected we’ve seen the rises in overall cost caused by increasing demand and user growth slowdown. Furthermore with the launch of Custom Edges many brands began to build their onsite presence as they saw the potential through technology like the Guardian and Spotify apps. This improved the efficiency of medium cycle ads. At the same time demand for offsite ads increased but without the same tools as onsite brands at their disposal their CPC suffered, making it more difficult to maintain the same ROIs previously enjoyed. The evolution of Sponsored Stories also drove advertisers towards a more Facebook-centric strategy, further increasing the efficiency of the Medium Cycle.In other words, Facebook improved its platform with new advertising units and user features, and this generated increased advertising activity, but only really gave extra value to advertisers who were employing a medium cycle approach, whilst long cycle advertising suffered from higher prices and no tangible conversion benefits.What this means for social advertisingWe are now able to quantify the effects of numerous “game changers” that were announced at F8 in September last year. The changes made by Facebook not only display a high degree of intent but also a great deal of foresight.With the release of Timeline and Open Graph Facebook has provided the necessary tools for short and medium cycle ads to improve as we approach full maturation. Without additional technological or campaign management support long cycle ads will continue to lag behind in terms of both continuity and content.The way social advertising needs to be approached has changed. In the same way that television advertisers were forced to produce entertaining ads when their medium of entertainment matured. Social advertisers are now finding that they need to produce ad cycles that allow users to interact and even socialise with brands now that their interactive and social medium has matured.

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