This presupposes that this tracking heavy targeted advertising has positive ROI for these small businesses. Is there any evidence this is actually true?
Yes. This question seems to come up constantly as if advertising is still some arcane art. Facebook and Google are incredibly good at this and have the valuations to show for it.
Highly targeted advertising can produce great results and there was a time where Facebook was basically a money-printing machine for affiliate and ecommerce because it was so good at finding and reaching the perfect customer. This has become saturated and results have dissipated somewhat but it's still very strong.
Small business are well known for making very poor decisions on average. Just look at Groupon and Food Delivery App XYZ. Moving lots of inventory at negative margins is much easier than doing so profitability, which is one of the reasons they so frequently fail.
I think small businesses are intended to refer to e.g. mom and pop businesses, not moderate sized startups. Not that that necessarily detracts from your point.
My point was a huge number of businesses failed to benefit from Groupon etc. Profitable small business are on a tightrope with failure on one side and growth on the other. The kinds of businesses that can really leverage targeted advertising are exactly the kinds of companies that stop being small businesses.
It was a question of ROI, and targeted ads are simply more difficult to use well.
Putting up a large sign outside convince store is going to target people in the area well enough. Giant companies like Disney can easily produce different ads to target individual slices of the population for similar results. But, how well can a small river rafting company for example leverage demographics data? Meanwhile because some companies find this data useful they suddenly need to pay a premium, which just doesn’t seem likely to pay off on average.
Ads aren't magic. When and how you use them has a significant impact on actual ROI, just like anything else in business. Part of the value of these adtech companies is that they can do most of the heavy lifting for you, so even small businesses can target and optimize without a large team.
If you want to target river rafters then you can just target people with "river rafting, outdoors, adventurer, travel" interests, or followers of your page, or upload emails of existing customers. Then let Facebook find similar people automatically. It's that easy.
Everything else being equal, targeted ads still do better than non-targeted ads. I don't see how this is so controversial.
They could clearly target say “river rafters” but it’s less clear if such a group going to cost effectively bring in new customers. The risk is if you target people that are looking into river rafting your simply poaching current or future customers who would know about you either way.
That’s the thing, it’s very easy to advertise to existing customers, worse your competitors are likely to bid up any easy associations. So, the most common case ends up in failure. Perhaps you didn’t something that works you can double down on, but that’s in practice extremely rare these days. Far more common is to realize after the fact you just spent a lot of money on a negative return.
I think you're arguing for the sake of argument here.
Targeting people who have obvious self-selected and data-driven interests in what you're selling is going to do better than generic ads with no specific audience. This is practically science at this point. However nothing is guaranteed and a specific campaign not providing results doesn't have anything to do with the concept of targeted advertising.
It's not impossible that Facebook and Google capture all of the value--or more--that their clients generate by running ads: Bob's Burgers runs $500/mo worth of ads, only generates $400 in (new) profit from them, but is afraid to stop because Paul's Pizza is also running ads and they might lose even more marketshare.
That's theoretically true but not true in reality, ask one of any of the thousands of new (in the last ~8 years, since FB launched lookalike targeting) businesses that grew to millions of dollars of revenue off of FB ads. I personally know at least 10 whose primary early growth mechanism was Facebook ads. They work.
They found that paid (i.e., ads) and unpaid traffic were nearly perfect substitutes for brand names: people will either to get to eBay. For non-brands, clicks go down, but sales don’t; ads are mostly attracting “browsers”, rather than buyers.
The real answer is that it probably depends a lot on the industry, market, and individual business.
That paper is mostly referencing brand search at large companies which is completely different than lookalike ads for small, unknown companies. I'm not really sure how the comparison is relevant.
If your point is that effective advertising strategies vary by company then I agree, but that is a tangential and meaningless point in the context of the above conversation.
You pointed out a niche where internet ads apparently worked well (though isn’t some of that just survivorship bias?)
I found the eBay data interesting because AI had assumed that they would have a fairly sophisticated online operation, and yet neither the branded nor non-brand ads really helped (for the latter, removing ads led to -40% on clicks, but -2% on sales).
I can’t imagine that the neighborhood pizza place is really doing a top-notch job on ad attribution; it seems a heck of a lot more likely that they throw a few ads up because everyone else does too.
That “niche” is the reason Shopify is a 100+ billion dollar company.
With respect to eBay, proving someone sucks at running ads isn’t the same as proving ads suck. (also it matters a lot more what % of sales the ads in this case represented, rather than just the absolute change in sales).
I agree with you about the neighborhood businesses fwiw.
If it's about lack of decrease in market share, then the existence of the ads product is not a net positive for small businesses. It is potentially just extracting a rent out of them without any aggregate benefit by pitting businesses against each other in a coordination problem.
If a company creates better kitchen equipment that allows one shop to make better food, isn't that the same thing? Is it now rent-seeking that anyone who can provide an advantage can potentially sell that to all the shops so they all remain competitive and not lose market share?
Prediction and attribution are really hard. I linked a paper below showing that eBay was wasting money on entirely ineffective keyword ads. I can’t imagine that most small businesses (especially brick and mortar ones) are much savvier.
Why is uncertainty specific to ads? That's part of anything in business whether it's a new office, new equipment or new salesperson.
Whether something provides a return or not for your specific situation doesn't have anything to do with whether the product itself is working and valid.
Ebay situation is different because search is as close as you can get to "intent" in advertising. You don't need user-targeting when you have a search query telling you exactly what they're looking for. Targeting is a proxy for that kind of intent when it's not available.
Look, I am not arguing that ads, of whatever sort, cannot ever work for anyone. I'm sure that internet marketing is a key part of some companies' business plans. Warby Parker, perhaps.
What I'm not yet convinced of is that they're a panacea for all small businesses. Details aside, one moral of the eBay paper is that a $50B business, with a whole dedicated department, still managed to make a dog's breakfast of their online advertising; Uber reported similar problems earlier this winter.
It seems hard and it's not obvious to me that every business has the aptitude, market, or business model to do it well. At the same time, I can easily imagine people deciding "We need to do something about advertising" and then forging ahead with whatever something they land on. This is especially true with the ROI is difficult to calculate--and I do think it's probably harder to calculate for an ad than for something with very standardized cost/performance characteristics like new equipment.
Google, Facebook, and Shopify making money doesn't really answer this question. As an analogy: "Is there gold in them there hills?" "Sure, even the guy selling shovels is making money!"
I just told you why Ebay's situation is different. Uber was defrauded and wasn't a failure of advertising.
Advertising can be complicated, but part of the value of these giant networks is helping to run those campaigns effectively. I'm not sure why you think everyone has to put in similar amounts of effort. That's not necessary at all. You have tools from simply setting the budget and targeting lookalikes of people liking your posts (what most small businesses do) to running your own bidder stack (for larger brands that have entire agencies working for them).
While attribution will never be perfect, it's not guessing either. Ecommerce only makes it easier as you can track all the way from exposure to checkout, and in some ways can be more attributable than other businesses expenses.
I'd love to see some research about this from an unbiased source showing that targeted advertising produces great results in small businesses (<100 employees, or <5M revenue yearly).
It would also be important to know, not if ads can produce great results, but how many companies do they provide great results for? Even better, what percentage of all business that run online ads get a positive return on their investment, and what is the average of that return.
My personal experience is that it is pretty hard to get consistently good performance running campaigns on FB or Google. It requires a lot of learning and a lot of trial and error. On top of that, they constantly push you to spend more by giving you dubious recommendations on how to “improve” your campaigns. Very hard to believe that the average small business is actually capable of running good campaigns and consistently make money from them.
What about all the actual small businesses that have positive ROAS? There are millions of them on Facebook's platform. What kind of other research are you looking for?
Yes. I know someone who runs a blog that shows ads. Since Google adwords/sense and modern targeted ads became a thing their revenue from the business has basically doubled if not more.
