Ever since the rumors of Facebook’s initial public offering surfaced, numerous investors and business analysts have questioned the viability of its business model in general and its mobile advertising strategy in particular. This Thanksgiving, Facebook (FB) offered some insight into its strategy when it rolled out its biggest mobile-advertising campaign ever, pushing 50 million ads to its users within a three-day span, all on behalf of one client—Wal-Mart (WMT)—which bought 2 billion Facebook ads over the entire holiday season. Wal-Mart prepurchased the ads, thus elbowing out the competition and boosting the credibility of Facebook’s mobile advertising model. Wal-Mart’s move was in stark contrast to General Motors’ (GM)decision earlier this year to stop advertising on Facebook and channel its online advertising to search engines such as Google.
What is Wal-Mart’s rationale for its Facebook foray? First is the issue of scale. The world’s largest retailer, whose online ad budget exceeds $2 billion, is a natural partner for the world’s largest social networking site. But there is more to it than Facebook’s ability to deliver an audience that is a match for Wal-Mart’s hefty and diverse customer base.
During the holiday season, many consumers make discretionary purchases, buying gifts for others as well as indulging themselves, frequently making in-store decisions based on available products and current sales promotions. Seeing items on sale and knowing Wal-Mart’s reputation for low prices, many consumers respond to its promotional ads. Thanks to Facebook’s mobile strategy, some may have even responded to Wal-Mart’s ads while shopping in other stores, diverting their spending to Wal-Mart.
There is another reason behind Wal-Mart’s Facebook strategy. Wal-Mart is using direct response advertising to invoke an instant response from consumers. The benefit of this type of advertising is that its effectiveness can be easily measured—a factor that is particularly relevant given the current push among many companies for greater transparency on their marketing expenditures, especially when it comes to advertising on social media websites. Direct response advertising offers an answer to this concern about accountability.
So far it seems the campaign has been a success for Wal-Mart and Facebook. Yet the effectiveness of Wal-Mart’s Facebook strategy is likely to be much greater during sales seasons when many consumers have a spending mindset. The downside could include not only the lower effectiveness of Wal-Mart’s ads during the rest of the year, but also the reaction from Facebook users, many of whom resent being bombarded with sales promotions. Managing short-term profitability while creating long-term customer value is going to be the key to both Wal-Mart’s and Facebook’s success in mobile advertising.
Another scenario to consider: Wal-Mart’s Thanksgiving strategy might set a precedent whereby many retailers follow in its footsteps and start promoting on Facebook primarily during major holidays—an approach that could end up driving up the prices for online ads while reducing the effectiveness of each individual ad due to promo-clutter. This year Wal-Mart managed to sidestep the competition by preemptively purchasing ads, but this strategy is likely to be closely monitored and replicated by Wal-Mart’s Web-savvy competitors, such as Target (TGT) and Amazon.com (AMZN).
To address this challenge, retailers like Wal-Mart, Target, and Amazon might consider using Facebook not only to push their products but also to build their brands. This strategy can extend beyond the holiday season, with the additional benefit of being better received by Facebook users.