Twitter and Facebook share a problem: Proving social ads and ‘likes’ work

From Gigaom:

There’s a been a big focus recently on the advertising strategy at both Twitter and Facebook, with two in-depth profiles of Twitter in the Wall Street Journal and BusinessWeek that spent a lot of time talking about the company’s ad model, and increased attention on Facebook for moves aimed at improving ads, particularly on mobile platforms. Both are seeing their share of the ad market grow, but there is still one big question standing between them and the multibillion-dollar valuations they have received from investors — namely, do ads inserted into social activity actually work?

While Facebook is orders of magnitude larger than Twitter, the impetus for both companies to develop a robust advertising business is the same: because investors are looking for a stable — and rapidly growing — revenue stream. For Twitter, it’s about justifying the $8-billion market value it currently has as a result of raising funds from a host of venture investors such as Russia’s Yuri Milner, and for Facebook it’s about justifying the $100-billion market value it is expected to get when it finally goes public later this year. While Twitter has some revenue from licensing its data and Facebook has some from online payments, advertising is still the biggest part of the story.

For Twitter, its foray into advertising came first with Promoted Tweets and was then extended with similar offerings, such as Promoted Trends — and recently, the company started offering companies a “self-serve” ad platform similar to the one that Google has with AdWords. Advertisers only pay for a promoted tweet, which Twitter CEO Dick Costolo calls “the atomic unit of our ad strategy,” if a user interacts with it by clicking on a link or retweeting the message. The company says that these tweets have an engagement rate of 3 to 5 percent, compared with a 0.5-percent click rate on banner ads. A Twitter VP says the ad strategy will soon be shown to be a “juggernaut.”

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