As pointed out in my previous blog, online advertising is a BIG business, and social networking is becoming a significant part of that market.
The question is whether spending ad money with a social network is really the best way to take advantage of Social Networking. Is it better to spend at least some of that money on your own company’s web site to add social networking capabilities?
Let’s look at Search Advertising. It is based on a model that takes all of the profit from competitors. Company A and Company B will both bid up the price of the ad for an item that they both sell until the point that they do not make a profitable return. I know there are many e-commerce businesses who sprung up and took advantage of early leadership in search ads, building up spending to be 25%+ of their total revenue. They initially made money as they built up sophistication on using Adwords, finding profitable keywords ahead of their competition – but those advantages decrease over time. Then Company A and Company B are forced to continue spending at the high rate to continue to generate the non-profitable revenue that they now need to keep their volume up for their overall business. No wonder Google has grown so fast and profitable as it “Does No Evil” (except drain the profit from e-commerce companies by creating an efficient market).
Spending money on a banner ad on a social networking site will have similar consequences. Company A and Company B will both bid for the same targeted profile users or groups on Facebook up until that click-thru produces negative results. Of course banner ads have always had the same problem, and the benefit of a more targeted user or group in social networks offers only temporary competitive advantages until other competitors show up to advertise on that site. Good for the Social Network, but not a competitive advantage for the business.
Finally, advertising has always had the negative attribute of being a continuous expense. Businesses have always looked to retain customers as their low cost alternative and hope for the magical “word of mouth” that give very large competitive advantages.
In comparison, extending your company web site with social networking applications can truly build value in your own brand. As discussed in a previous post, social applications can bring large value to your web site with increased:
- Engagement of your users
- Loyalty by having your users be involved
- Virality within your own site and the larger social networks
- Moving from Personal to Social interactions
These basic values help you keep your existing customers and enable the most powerful method of marketing – “word of mouth”.