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How Facebook Makes Money

Companies are waking up to the profit power of Big Data. But it is not just big tech companies tracking your every move - radio and retailers are too.

Emma Wall 11/04/14

Consumers are used to a certain degree of targeted marketing. Television advertisers have always placed pertinent ads around TV programmes – children’s toys at 4pm, cash for gold during the working week, holiday providers either side of foreign location programming.

But the internet has opened the floodgates for targeted selling and an increasing number of companies not only spy on you for their own gains – but can sell on this data to boost revenues too. While as customers of these services this kind of personalisation may make you uneasy, as shareholders it’s a welcome development that opens up avenues that can boost profits.

Hussein Fazal is CEO of AdPalor a company that places adverts on Twitter (TWTR) and Facebook (FB). As one of only 13 ‘strategic partner’ advertisers on Facebook, Fazal is responsible for a significant proportion of the made-to-measure ads that pop up in your feed and line the side of your browser.

Fazal says that companies such as Google (GOOG), Facebook and Twitter are using ‘big data’ to learn more about prospective customers, and hone adverts to maximise sales’ potential.

“Google search has one of the highest conversion rates of advertisement to sale,” he said. “Google is able to use the information you have provided in the search box, to tailor advertisements to you. Facebook users can now be targeted by cross referencing their email addresses with companies’ customer databases, and by tracking where a user has been online before the Facebook website.”

Been on a holiday website but didn’t make a booking? The ad for the same website will appear on Facebook, using your web history, to encourage you to ‘book now’. If you did make a booking, the ad will change, asking you if you want to ‘upgrade now’ instead.

This sleek, ever evolving advertising model is paramount to Facebook’s success as a business, and advertising revenues are the key to its valuation.

It is not just Facebook who is getting in on the act either. Online radio station Pandora allows listeners to personalise their playlists and stream the station through mobile devices and computers – as well as cars, Jacuzzis and even fridges. Pandora targets the adverts played on its stations based not just on geographical location as traditional local radio do, but also based on listeners age, sex and even taste in music.

Retailers are using big data to cut wastage and boost sales. On a recent analyst roadshow on the west coast of America, Neptune US Income fund manager Rebecca Edelman said that clothing retailer Gap (GPS) had effectively implemented big data.

“In the past Gap would be left with a lot of wastage at the end of each tear – hundreds of unsold garments,” she said. “But now, they track what items sell well where and feed that requirement. Stores in different regions also now communicate with one another. If there is an excess of red t-shirts in one store and a lack in another these will be shipped to where they are needed.”

It sounds simple, but it is these kind of efficiencies and smart communications that have helped the Inditex (ITX ) – the retailing giant behind Zara and Mango – share price rise more than 50% in the past three years. That is the kind of data shareholders can get behind. 

About Author Emma Wall

Emma Wall  

Emma Wall is Editor for Morningstar.co.uk