Facebook IPO and beyond: Catherine Tucker sees rich new revenue source in social advertising

MIT Sloan Assoc. Prof. Catherine Tucker

Much of the attention on Facebook’s initial public offering this week has been on whether the social networking giant is valued too highly. But whatever its current worth, Facebook has a potentially huge new source of revenue coming its way from “social advertising.” According to a new research paper I’ve just published, Facebook itself is only just beginning to realize the untapped potential of social advertising, in which marketers use online social relationships to improve ad targeting using data on Facebook users’ friend networks.

My research counters the prevailing view that social network websites are unfruitful venues for paid advertising. That old view is based on older models of advertising, such as display ads. For our research, we compared both traditional and social advertising by a charity on Facebook. The result? Social ads, which were targeted to friends of “fans” of the charity on Facebook, were twice as effective at attracting clicks.

Facebook has only recently figured out what is unique about all the data they collect. Put simply, Facebook knows who peoples’ friends are, which can be hugely valuable to marketers.  Feeding that social network directly into the algorithm that Facebook uses to target advertising creates a huge profit potential. And right now, that advertising potential remains mostly unexploited by marketers.

Catherine Tucker is Douglas Drane Career Development Professor in Information Technology and Management; Associate Professor of Marketing

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