Will Facebook’s Missed Call Ads Work?

Facebook (NASDAQ:FB) is going to debut its ‘missed call’ ads in India, in a bid to connect advertisers with a large untapped market of feature phone users in the country. ^[1] The feature allows users to press a button to place a call to relevant advertisers and then disconnect it. The user then receives a call back playing a pre-recorded message, detailing offers and discounts by the advertiser. The ‘missed call’ ad feature has been primarily launched in India because of the relatively low smartphone penetration in the country. As a result, many Facebook users never get to interact much with its feed-based ads, which have been the primary force behind the recent growth in its ad revenues. Additionally, the ARPU (average revenue per user) in Asia is much lower than Facebook’s global average. This means that the company will need to experiment with ad formats that suit the region, and other emerging markets the best.

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More Efforts Needed To Improve International ARPU

Compared to average revenue per user of $6.03 for the U.S. in Q4 2013, the figure for Europe, Asia and rest of the world stood at $2.61, $0.95 and $0.84, respectively. This suggests that Facebook has tremendous opportunity to lift its monetization in international markets. Much of this improvement is likely to come from Asia.

Despite harboring majority of the world’s population, Asia accounts for just 30% of Facebook’s monthly active users, primarily due to the company’s limited presence in China. Revenue figures tell a similar story for the quarter ended December 2013, Facebook’s average revenue per user in Asia stood at $0.93 compared to global average of $2.14. The online advertising market in Asia is still in its nascent stage as compared to the U.S. and other developed markets, but the growth is imminent and Facebook needs to be ready for it. Establishing strong market position in China and India can give a material boost to the company’s business going forward

How Well Will ‘Missed Call’ Ads Do?

Facebook has approximately 100 million monthly active users in India. Considering that about 75% of its monthly active users access the platform from their mobile devices, we conclude that Facebook’s mobile users in India could total somewhere around 75-80 million. The questions that must be answered are:  how many of these are likely to use ‘missed call’ ads and how often? To answer these questions, we first need to understand click through rates for Facebook’s existing news feeds. Some studies and estimates suggest that click-through rates for Facebook’s feed-based ads could range from 2% to 6%. ^{[2] [3]} Assuming an average figure of 3% will imply that Facebook’s feed-based ads experience 3 clicks per 100 impressions.

Will ‘missed call’ ads do better or worse? We believe that the click-through rate for these ads is likely to be much lower because of two reasons. First, the engagement duration and effort required for ‘missed call’ ads are likely to be higher, thus discouraging a lot of users to try them. Second, these ads will primarily be used by feature phone users where advanced features of smartphones don’t exist, thus compromising the engagement of Facebook’s regular feed-based ads. On the flip side, the ad pricing is likely to be higher because of improved targeting and our perception that engagement via phone call is more likely to result in a purchase. This is because only serious inquirers are likely to make the effort of placing and listening through the calls.

Improved Ad Targeting Will Help In Better Negotiating Ad Prices

Improved ad targeting has helped Facebook deliver strong ROI (return on investment) to marketers and advertisers. This, in turn, has helped it command higher priced ads. As an example, the company’s ad revenues jumped 82% in the first quarter of 2014. This was primarily attributable to a growth of 118% in Facebook’s average ad pricing. ^[4] This was much higher than Q4 2013’s ad pricing increase of 92%, despite the tougher year-over-year comparison. This resulted from the growing proportion of feed-based ads which are aesthetically pleasing, highly targeted and less annoying as they appear to be a part of Facebook’s usual news feed. This leads to higher engagement which encourages advertisers to pay more. We believe that ‘missed call’ ads will be highly targeted too and could command strong ad pricing. Recent experiments around this format have shown positive results.

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1. Facebook Debuts ‘Missed Call’ Ads in India So It Doesn’t Miss a Huge Emerging Market, Bloomberg, July 2 2014 [↩]
2. Facebook Ad CTR Study– Newsfeed v Display: From The Wolfgang Lab, Wolfgang Digital [↩]
3. Facebook Ads Are Killing It. But Why?, Digiday, Oct 28 2013 [↩]
4. Facebook’s Q1 2014 Earnings Transcript [↩]