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Business Reputation Doesn't Come Cheap
Posted on November 20th 2012
Recent controversy over Facebook adjusting its EdgeRank algorithm to allegedly minimize organic reach and increase sales of promoted posts prompted me to write this post. While the rumors, in my opinion, have beenput to rest, the concept of companies like Facebook charging brands to access the audiences they have invested in building is unfair.
Mark Cuban, tech billionaire, owner of the Dallas Mavericks, and Shark Tank investor, initially voiced his frustration over the supposed shift. Mark tweeted he would be moving the marketing focus and dollars of the Dallas Mavericks, along with his other 70 investment companies, to other platforms after being quoted $3,000 to promote his Facebook update to 1,000,000 fans.
Companies spend a considerable amount of time developing strategies, content, and promotions to grow their community on Facebook, and they value each and every fan. From large organizations to small mom-and-pop businesses, building a following on a social network requires a significant amount of time and money.
Facebook adjusts its EdgeRank algorithm on a weekly basis, but Product Manager Will Cathcart stated that September’s change was larger than usual. Cathcart said the goal was to minimize spam appearing in the Newsfeed. As a result, organic reach of the average Facebook post has dropped 40% since the end of August.
While Facebook claims that median reach will stay above 16%, a study conducted by We Are Social shows recent stats approaching a mere 10%. Overall, posts have never reached 100% of fans, but the rapid drop from an average of ~18% to now ~10% is troubling. Facebook’s solution: pay for sponsored posts to access the other 85%.
A proposed motivation for the shift is Facebook’s less than ideal IPO. Since the initial offering the stock has dropped more than 50% and is putting pressure on the company to determine a sound monetization strategy. Unfortunately, the result is nearly 80% of Facebook’s Newsfeed being overrun by advertisements (above-the-fold).
Not surprisingly, Sponsored Stories is working and creating increased engagement. TBG Digital released areport back in July (prior to the spam adjustment to the EdgeRank algorithm) showing that sponsored stories have 53% more engagement than standard ads. Mobile ad Click Through Rate (CTR) is 1.14% versus 0.083 for desktop ads and 0.588% for desktop newsfeed ads.
More importantly, with roughly 57% of Facebook’s users accessing the site through mobile, its mobile ads CTR is up 31% y/y. The change represents a strong shift for Facebook’s long-term prospects, but is in my opinion, immoral on behalf of the company. Brands, agencies, and individuals are now charged to reach their own fans.
Similar to Facebook building communities and minimizing the effectiveness of communications from businesses, Yelp allows organizations to build a reputation around their product or service offering, but then unjustly leverages its position as a market-leading discovery platform.
Yelp has been at the center of much controversy over the years. Accusations focus on the company accepting payment to hide negative reviews, highlight positive reviews, remove competitor ads from listings, and even slightly adjust the algorithm used to determine average star rating to be more favorable.
CNSLT.us works with a number of businesses within the hospitality and restaurant industry (37 to be exact) and has extensive experience with clients’ relationships with Yelp. I have experienced the sales calls, the hesitation of Yelp representatives to put anything in writing, and the overall misrepresentation of Yelp’s goalto connect people with great local businesses.
The concept is far from innovative. Newspapers and magazines have been practicing similar revenue models for decades. Editorial lists of restaurants in every issue (e.g. Best Bars, Romantic Restaurants, New Must Try Places, etc.) typically have a strong correlation to the specific restaurants that purchased ads in the same publication.
As quoted in an Inc.com article on Yelp’s IPO, Rocky Agrawal, a digital media analyst, stated, “even when compared to its own ads for national advertisers, the company is charging a 100x premium… Yelp’s business model is closer to that of yellow pages companies: sell a questionable value proposition to many who don’t understand what they’re buying.”
It seems that there is no method to build a truly honest reputation around your business.
I understand that both Facebook and Yelp need to create viable revenue-generating strategies to maintain their businesses, but their models should not interrupt the features their users have grown to rely on. A prime example of a successfully added revenue strategy is Foursquare’s advertising.
Foursquare has always allowed for businesses to claim their location on its service and to offer incentives to customers for checking in and sharing with their networks. As of this summer, Foursquare has added the ability (limited at first) for brands to pay for promoted updates – sound familiar?
“[Promoted Updates] are designed to target users whose friends frequently stop by, who have added that venue to one of their Foursquare lists, or who are often visiting similar venues in that neighborhood. These ads aren’t intrusive: They’re confined entirely to the ‘Explore’ tab,” shared by Lauren Indvik of Mashable.
While Yelp is targeting uninformed small business owners, Facebook is up against loyal users who have grown accustomed to its platform as a marketing tool. Facebook is purposefully breaking a system it spent years perfecting because the worse the platform performs, the more likely advertisers will pay for Sponsored Stories.
Dangerous Minds is one company voicing its frustration with the change. It calculated the number of updates per year, the associated costs it would incur by paying for Sponsored Stories to achieve the same reach it previously had, and the total investment would be $672,000. Dangerous Minds does not think that is an appropriate investment.
Neither do I.
This post originally appeared on Keith Petri's Blog: www.KeithPetri.com. Keith Petri is a small business consultant focusing on implementing new technologies and providing traditional consulting services for his clients in the restaurant and hospitality industries. Keith conducts market research analysis to implement strategies to increase customer base. Follow Keith on Twitter here: @KeithEPetri