Waze could become a smash hit for the Facebook Inc (NASDAQ:FB) ecosystem. It can be the grease in the wheel Facbook needed in order to provide unique analytic insights that it did not have before. The $1 billion buyout is generating a lot of media attention.
To Facebook justifying to advertisers the reason for why they should market themselves is extremely important. This GPS system will directly link with a Facebook Inc (NASDAQ:FB) account, Facebook can then accurately identify the number of times a person has walked into a store. That being the case, by measuring the amount of times a Facebook user frequents a store; it can measure the effectiveness of a Facebook based advertisement.
The reason this is crucial is because Facebook Inc (NASDAQ:FB) doesn’t have enough real-world data on the effectiveness of advertising through Facebook. The GPS technology brought through Waze could be a potential solution to this short fall in information.
Facebook integration of Waze
Here’s the strategy I believe Facebook’s upper management team is after. Assume for instance, a consumer likes the Wal-Mart page. Assuming the same consumer has a Facebook Inc (NASDAQ:FB) mobile app (according to the latest quarterly report Facebook had 751 million mobile users) Facebook can track the number of visits a person has made to the Wal-Mart store before and after the person followed Wal-Mart. After averaging the increase in visits over time, Facebook can use the average purchase amount a consumer makes at Wal-Mart. This will result in an accurate idea as to how much return on investment Facebook’s advertisers are making from their social networking initiative.
The calculation would be simple. (Visits per month x percentage increase in visits x the average retail purchase amount) – (visits per month x average retail purchase amount) = average increase in retail purchases. Following that, Facebook Inc (NASDAQ:FB) could then calculate the net margin in order to come up with an accurate conclusion as to how much money advertisers are earning by advertising goods and services through social media.
To come up with a generic statistic for the average retail purchase amount, I looked up the Visa annual report and found the payment volume and total nominal payment volume statistic. I divided nominal payment volume by the payment volumes in order to find the average worldwide transaction value. For all you statisticians out there, the data is highly accurate as it represents $6.25 trillion in transactions meaning we have a very large and accurate sample size. I calculated that the worldwide average credit & debit card transaction is worth $117.20.
First the consumer made 10 visits and bought something per visit. After the person followed the brand on Facebook, the consumer increased the number of its visits by 30% for the rest of the year (remember we can track them since chances are they take their smart phone with them everywhere). Now we do the math (10 x 1.30 x 117.20) – (117.20 x 10) = $351.60
So in the original assumption we knew that the person bought 10 things per year from that store. After tracking the number of visits made to that store using GPS. We can identify the percentage increase. We then calculated that the value of that increase was worth $351.60 using average transaction data. Following that we can then calculate that the $351.60 generated a net profit of 10% (S&P 500 company’s generate 10% profit margin on average which is where the 10% came from). So we multiply $351.60 with the 10%. This calculates the value per follower which is $35.16 in this illustrated case.
Now this is just an illustration with many general assumptions that may not apply to all advertisers, but the idea was to show how powerful the impact could be. A mix of real world data and quantitative data from various sources of statistics and data can be used so that Facebook can better monetize the amount of money it makes from companies who choose to use social media advertising. By tracking consumer buying behavior over time, Facebook can justify the price companies would have to pay in order to advertise.
The reason this is crucial to Facebook is because companies are unable to identify the exact benefit derived from social marketing. The reasons for why a person purchases a good or service is numerous. But if Facebook at least provided information on changes in buying behavior after the person followed the company versus before it followed the company, Facebook Inc (NASDAQ:FB) can better justify the value of social marketing.
Even Google Inc (NASDAQ:GOOG) doesn’t have access to real-world data analytics
Competition will be heating up between the network of advertising Google, and Yahoo! Inc. (NASDAQ:YHOO) have set up versus Facebook. Facebook could pull ahead in the internet advertising space by utilizing even more specific purchasing behavior data that Google and Yahoo! may not have access to. When advertisers advertised on Google Inc (NASDAQ:GOOG) they could rely on the return on investment from an online e-commerce setting, but Google couldn’t come up with an accurate statistical model for advertising return in real-world retail settings. This could put Facebook ahead of Google in terms of analytics, which is something that Google prides itself on.
A couple years ago, analysts and investors were scratching their heads when Google Inc (NASDAQ:GOOG) acquired Double Click. Double Click was a buyout valued at $3.1 billion. The buyout was done in order to make it easier for advertisers to measure the return on marketing dollars. Following the integration of Double Click Google generated earnings growth of 36.60% within the same year.
The Google Inc (NASDAQ:GOOG) case history clearly proves that providing accurate analytics will lead to a rapid transformation in the amount of revenue and earnings a web-based advertising model can earn.