Simon’s Blog

Jason Calacanis, CEO of Mahalo, has a great post about advertising failing on Social Networking sites.  He poses the question: what should social networking sites do to monetize their huge traffic?   Have I got the definitive answer?  Possibly not!  In fact, I can tell you that we’re not working on social networking, precisely because I’m not sure how to monetize social networking traffic.   However, I do have some ideas…

The Pubmatic study that Jason writes about (coming via Mark Dempster, the Marketing Partner at Sequioa Capital) shows CPMs, the cost per thousand views of an ad, falling for social networking sites - look at the numbers for large sites in the figure below:

As Jason says, “social networking sites suck for advertising”!    However, while it’s undeniable that social networking sites are not currently great places for advertising, that doesn’t mean it has to be that way forever.

When people think about Internet ads, they tend to think of Google-style adwords ads. Without doubt, search is the killer application for these kind of ads; and to be honest, it may well turn out that search sites are the most valuable advertising platforms of all.  For the current context, though, I’m not sure that matters: the problem with social networking sites isn’t to make them more valuable than search sites.  Rather, I think it’s to make them simply highly valuable. Nevertheless, it’s clearly going to need some creative thinking to make real progress with social networking ads.

So, what’s the answer? Stepping back, the big picture, of course, is that ads need to be targeted to be valuable.  However, simply mimicking Google-style targeting may well be the wrong way to go.  I suspect it may turn out that social networks need not only a different way of targeting ads, but a different kind of advert altogether.

Now, as Jason rightly points out, when people are on a social networking site, they may not be thinking about making a purchase.   What does that mean for the ad strategy?  Simple - don’t run straightforward ads that simply expect a click-through for a near-term purchase.   The obvious tactic would be to use brand advertising.   However,  that doesn’t really address the fact that targeting adds hugely to the value of the ad.

My suggestion is as follows. Create a new style of ad, based around special offers and promotions, which in turn would be based on people’s interests as expressed by the social networking site they’re on and the individual profiles.   People are susceptible to special offers and promotions, even when they’re not actively looking to buy something.  Why?  Easy - free stuff and genuine money off offers get people’s attention.  For example, imagine you like mixing drinks, and have listed “cocktails” as an interest on your social networking profile… Then, if you see a “Buy one bottle of premium vodka, get a free sample bottle of our new pear flavour vodka free!” that might get your attention, even if you hadn’t previously been actively thinking about a buying another bottle of vodka.  Or, if you like playing golf, and you see an offer saying, “Want to play to the new competion rules? $80 dollars off our new driver, if you buy before the end of the month.”

The value to the consumer is clear - they can get some great deals on stuff they’re interested in. There are benefits for the advertisers, too. Companies often have promotions and special offers on their goods and services.   The benefit of giving companies the chance to target these offers, is the opportunity to connect their special offers with customers who are not likely to simply take the free stuff and run; but instead to attract good return customers, who will buy more of their products in the future.

By the way, I should say that this isn’t a new idea.  Credit companies have been doing this kind of targeted advertising for years; offering promotions and offers to customers based on their previous purchases, which of course they know all about.   It works for them, and it might just work for social networking sites too…