Since its IPO in early 2012, Facebook has been laser-focused on its bottom line. In a short timeframe, the social network ramped up its advertising business to increase profitability and maintain support among investors. Since then, the company has posted strong revenue growth spurred by new ad features and the extension of services to mobile devices.

This analysis assesses Facebook’s core advertising strategies—reach, relevance, social context, and engagement - and the key role of mobile in these efforts.

Reach

With over one billion monthly active users (MAUs) worldwide, Facebook provides adequate audience reach required to effectively deploy a powerful digital media campaign. These figures continue to rise, with Facebook posting a 25% increase of global MAUs in 2012 over 2011. The number of U.S. members continues to grow, with an increase of 8%, representing 174 million MAUs, in 2012 over 2011. For comparison, Facebook’s audience reach rivals that of online video usage in the U.S. Parks Associates estimates that at year-end 2013 there will be 175 million monthly unique online video viewers.

The social network is effectively scaling its reach to accommodate mobile use. At year-end 2012, around 64% of global users, 680 million, accessed Facebook via a mobile app­—an increase of 57% over the prior year. Of those mobile MAUs, around 23% exclusively use a mobile app to interact with Facebook. In the years to come, Facebook is poised to further strengthen its user base as well as its value proposition with the acquisition of Instagram, which has over 100 million registered users.

Relevance

Alongside its existing ad services (Sponsored Stories and Facebook Ads), the firm launched new ad products in the past year to increase targetability for brand advertisers and ultimately strengthen its advertising business model. Of note are the Facebook Exchange (FBX), a real-time bidding (RTB) ad exchange, and Custom Audiences.

With FBX, brand advertisers can target Facebook users based on their web-browsing history (e.g., ad is displayed on a profile page or News Feed based on third-party web-browsing habits). Advertisers can also purchase individual user impressions versus bulk purchases of 1,000 impressions (or CPM).

FBX opens up a large source of display ad inventory to the RTB market; comScore estimates Facebook’s share of U.S. display ad impressions reached approximately 28% in 2011. Since its debut, FBX has attracted around 1,300 advertising clients, and the firm reports it manages around 1 billion ad impressions each day.

Facebook’s newest ad product, dubbed Custom Audiences, offers an even more granular way to place the right ad in front of the right user at the point of intent. Advertisers can connect with their customers, who are also Facebook users, using secondary data (e.g., email address or app purchases) and deliver Sponsored Stories or News Feed ads. This approach will likely be popular with game developers targeting in-app purchase spenders; the developer can entice users with an attractive digital item or product displayed on their Facebook timeline.

These new ad features and products are driving value for Facebook investors. The company’s overall advertising revenues increased by 36% annually, from $3.2 billion in 2011 to $4.2 billion in 2012. The firm estimates revenues from mobile ads accounted for around 11% of total revenues, or $471 million, in 2012. And the portion of Facebook revenues coming from mobile is increasing. Mobile ad revenues accounted for 30% of total global ad revenues, or $373 million, in the first quarter of 2013.

Social Context

Arguably, the greatest value Facebook has to offer its advertising clients is in the form of word-of-mouth marketing­­. Consumers value recommendations from trusted voices (i.e., friends and family), and these recommendations can be a key factor in getting an app discovered in an increasingly crowded apps market. Parks Associates finds that, second only to app-store browsing, consumers typically discover new apps based on social recommendations. Facebook’s ability to attract new customers via social recommendations will continue to be a highly valuable approach among marketers of all types.

Engagement

In 2012, Facebook ramped up efforts to further raise brand engagement levels—specifically among app developers marketing their app product. Facebook’s newest ad product, Mobile App Install Ads, is serving this need. Using the service, app developers are driving higher app installs through ads displayed in the News Feed on mobile devices.

Facebook reports the service has been quite popular. In 1Q 2012, 3,800 app developers used Mobile App Install Ads, which produced 25 million app downloads. While the approach targets app developers, Facebook is also serving more ads into mobile News Feeds to service general brand advertisers (i.e., non-app developers).

As Facebook continues to expand its ad offerings, the firm must closely monitor user tolerance to the increase in ads served online and on mobile devices. Brand engagement is best achieved when combined with strategies that leverage Facebook’s core existence: social connections. Consumers will be far more open to and accepting of ads tied to a social recommendation—for instance, a branded Facebook page or ad that a connection “Liked” or commented on—than an ad appearing on the right-hand side of the webpage or inside a mobile News Feed.

Social context intensifies ad relevancy, and this strategy is the most effective way to prompt a response among consumers whose screens are already inundated with advertising and a variety of messaging.

From the article, "Mobile and Facebook’s Evolving Advertising Strategy" by Heather Way.

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