Despite reports of reduced spending on Facebook (NASDAQ: FB), it appears that social media companies still spend most of their time on their platform. Engagement metrics increased during the first six months of the year, according to data from Facebook’s Audience Insights tool reported by CNBC. The average number of responses, preferences and, especially, clicks on ads increased significantly between January and July this year.
The latter measure is extremely important for Facebook, which generates almost all of its ad revenue. The company is no longer increasing advertising costs (that is, the number of ads that users see in the feed) and increasing ad engagement is the best way for the company to continue to increase revenue.
Improve the feed
Early last year, Facebook made some major changes to its news feed algorithm. The most important change is that users will see fewer posts from companies and publications, as well as fewer viral videos. Instead, most users will see messages with photos and status updates from their friends.
Over the past year and a half, Facebook has continued to tweak its news feed algorithm to maximize the quality of content in people’s feeds. This includes advertising. As users see more and more relevant content from friends and businesses, engagement increases. This is especially true now that the company passed a major redesign of the news feed earlier this year.
In general, changes to Facebook’s news feed algorithm can make sponsored posts more prominent. Combined with a growing offer of ads, better targeting features and continuous improvements for creative ads, ad engagement is increasing.
Higher click-through rates are not only a good indicator for Facebook in the short term, but also provide a long-term boost because advertisers must be willing to bid more for ads that convert better. Therefore, more clicks and more valuable clicks in the future through your news feed will drive continued growth in revenue for your social media business, even if the total time spent on feeds goes wrong.
Don’t forget the stories
While Facebook continues to improve its revenue per user in its feed, the ability to improve ads in stories will be a big part of its revenue growth for years to come. Engagement in stories continues to grow rapidly, but the level of monetization is still in the early stages.
Despite 3 million active advertisers in Stories, Facebook has a lot of room for improvement in Stories, which will increase the number of clicks on ads in the format and the value of clicks. Many of the ad placements in Stories are simply recycle stream ads that Facebook automatically inserts into Stories. Simply attracting more ads in Stories will increase clicks on Facebook, which will happen over time, as the popularity of Stories continues to grow.
In addition, Facebook has not yet optimized the loading of ads in stories, nor has it developed many ad formats specific to stories. Improvements in these areas should lead to more clicks and more revenue for Facebook.
However, the growing involvement with Facebook’s news feed gives the company plenty of time to determine the best way to win stories. Investors should expect Facebook to spend their time generating revenue to maintain format growth and maximize long-term value. Keep management notes on changes in engagement and price per ad generated when reporting revenue calls.