For social media sites like Facebook (NASDAQ:FB), the business model is rather simple: grow time spent on the platform through a combination of more users or increased viewing times, and then monetize that increased traffic through a combination of methods.
For Facebook, its monetization has mostly come in the form of ad delivery. Over the last four quarters, or trailing 12-months, the company recognized $14.7 billion in revenue, with the vast majority -- 94%, or $13.7 billion -- being from advertisers, with the rest coming from payments and user fees.
Throughout the first six months of 2015, Facebook has increased its ad-based revenues 45% on a year-on-year basis by raising the costs per average ad a massive 251%, offset by a decrease in ad load. Simply put, the company is able to increase the price per ad so much they are able to lower the amount of ads displayed and still grow its top line tremendously. The company credits a shift to News Feed ads as the reason for the increase -- and according to the company, they aren't done perfecting the product.
Minor changes mean less friction
If you've been perusing your News Feed of late, you've probably noticed product ads have, well, more products. More recently, Facebook's multi-product ad carousel allows advertisers to display more inventory without increasing the amount of ad posts displayed in the timeline. To date, this has been a win-win for everybody: interested customers can browse the ads, uninterested ones don't receive a larger ad load, advertisers report higher click-through rates, and Facebook can charge more for effective ads.
Building upon that success, Facebook recently started testing a new ad delivery format it refers to as Canvas. Instead of a three-product format like Carousel, a click-through on Canvas takes the user to a fast-loading full-screen shopping page, complete with a link to the retailer's site for easy purchase.
While this can sound like a minor update, it could have big ramifications on Facebook's bottom line as advertisers will pay significantly higher rates for effective advertising. What Facebook is doing is lessening the friction from ad to purchase, and should be able to charge more per ad in the process.
The easiest way to lessen friction [slowly] continues ... and more
Of course, the most-direct way to lessen the friction between ad-delivery and sale would be to embed a buy button directly into the post to allow users to buy directly from the site. And Facebook's continuing to work on the inclusion of its Buy button, which is still in the testing phase, but has not introduced a full-scale rollout. In the interim, softer call-to-action buttons like "Learn More" or "Like Page" continue to increase in scale and prominence.
Finally, in a move to emphasize its new shopping features, the company is adding a Shopping section to its Pages section, as a way for consumers to discover and purchase new products. Ideally, people perusing this section will be higher-interest than those simply perusing their News Feeds, and should result in lower cost-per-action rates. Look for Facebook to continue to grow its top-line in the immediate future.