Facebook Uses Data to Charm Advertisers; Facebook Refined its Tools that Allow Advertisers to Target Users Based on Spending Habits in Brick and Mortar Stores

Facebook Uses Data to Charm Advertisers

Facebook Refined its Tools that Allow Advertisers to Target Users Based on Spending Habits in Brick and Mortar Stores

REED ALBERGOTTI

Jan. 30, 2014 9:17 p.m. ET

To make the journey from underachiever to advertising juggernaut, Facebook Inc.FB +14.10% had to do some advertising of its own.

With sluggish advertising numbers following its 2012 initial public offering, Facebook went to work improving its ad offerings. It also invested significant resources into proving to marketers that the money they spend on the social network comes back in higher sales.

Facebook posted record revenue and profit when it reported fourth-quarter financial results Wednesday, sending its stock to new heights and establishing it as a major force in the digital advertising industry. Facebook shares Thursday rose $7.55, or 14%, to $61.08. The company’s market value is now nearly $150 billion.

One little-discussed factor in those strong numbers: Facebook’s creative and sometimes tumultuous efforts behind the scenes to prove to the advertising industry that social networks can stand toe-to-toe with Google Inc. GOOG +2.57% when it comes to return on investment.

The tools prompted online home-decor retailer Wayfair LLC to more than triple its spending on Facebook ads in the fourth quarter of 2013, compared with a year earlier. “They’ve clearly been working on making these ad units very productive,” said Wayfair CEO Niraj Shah.

Last year, Facebook refined its tools that allow advertisers to target users based not only on what they share with Facebookin their profiles and posts, but what those same people do with their wallets in brick and mortar stores.

Facebook combined its own information with other insights from data vendors like Datalogix Inc., Acxiom Inc. ACXM +13.53% and Alliance Data Systems Corp.ADS +1.63% to create more detailed profiles of its users, allowing advertisers to target them more precisely.

Facebook also created what amount to digital science experiments, complete with control groups, to see how users responded to Facebook ads. With partners like Datalogix, Facebook could track whether those users bought products at the supermarket that they had been shown on Facebook.

“You need to be able to prove that you move product off the shelves,” said Brad Smallwood, Facebook’s vice president of measurement and insights. Mr. Smallwood said Facebook gave advertisers the first big report on how consumers responded to ads in the real world in the summer of 2012, focusing on 50 to 60 ad campaigns. “We’re starting to see all of that bear fruit,” he said.

The information Facebook shares with its third-party partners is anonymous, the company says, to protect the privacy of users. The company uses a process by which the data is encrypted, so Facebook can’t see the detailed information it gets from partners and vice versa.

“There’s more provable attribution for the effects of Facebook than there has been ever before,” says Dave Donohue of Unified Social, a digital marketing firm that counts companies like Toyota Motor Corp. 7203.TO 0.00% and Lenovo Group Ltd.0992.HK -8.21% as clients.

In an interview Wednesday, Chief Operating Officer Sheryl Sandberg said a Facebook advertisement from Coca-Cola Co.KO +0.71% featuring cuddly polar bears actually had a bigger impact on sales than the television version.

Just like Google proved that search advertising could be profitable, Facebook is beginning to do the same for social media, proving that social media companies can establish themselves as profitable advertising businesses.

Facebook still has a long way to go to catch up to Google, though. According to eMarketer, Facebook accounted for about 6% of the $117.6 billion global ad market in 2013, compared with Google’s 31.5%. Facebook is growing faster in mobile advertising, with an 18% share, up from 5% in 2012.

Advertisers use Facebook and Google for different reasons. Google is effective when people search for things they already want to buy and then see ads for relevant products. Facebook is better for educating consumers about products they might want to buy in the future.

“The smart brands learned to use Facebook to create demand, and Google to fulfill demand,” said Bob Buch, chief executive of social advertising company SocialWire.

Facebook’s advertising product is still a work in progress. Wayfair’s Mr. Shah says his company still sees a higher return on Google ads, for example. And Facebook has yet to implement tools that allow small and medium-size businesses to track their customers in the same way.

“I can’t say we’re anywhere close to done on anything,” said Mr. Smallwood. “We’re never going to be done with this because the world is going to keep changing.”