Exclusive: The Man Who Revs Facebook’s Money Engine

Ryan Tate

Gokul Rajaram is a patient man. Which is fortunate, because the Facebook advertising product director has a lot of teaching to do.

Outsiders can’t seem to wrap their heads around how Rajaram’s technologies are going to generate profits for his employer. Wall Street in particular seems nervous as Facebook prepares to publicly report its quarterly earnings for the first time today.

But Rajaram takes a longer view. He’s been focused on advertising tech for 15 years, ever since he joined the free modem-service provider Juno after the birth of the first banner ad. If you take a deep breath and enter Rajaram’s poorly understood world, ad jargon like “CPC,” “remarketing,” and “consideration set” fades into the background, and you start to understand his rational, even compelling story about how Facebook can sell things to its users.

The gist of Rajaram’s message is that our lives are consumed by purchase decisions, more than we might care to admit. Look at all the product shots on display at Pinterest, Tumblr, and Twitter. Or just skim your Facebook news feed for brand names like, say, Netflix, or Nexus, or Apple, or “Downton Abbey”. “I will see just a lot of my friends’ stuff where they’re talking about a brand,” Rajaram says.

Facebook’s advertising mission, then, is not to inject commercial messages into social discussions, but to amplify the messages that are already there. And it’s not to drive immediate purchases, as Google’s contextual advertising does, but to influence buying decisions a little further down the road.

Rajaram refers to the stage in the days or weeks before a purchase as “mid-funnel.” To understand mid funnel is to understand the potential value of Facebook-style advertising. To be ignorant or dismissive of it is to be where Wall Street is right now.

“The perfect example of lower funnel is search,” says Rajaram, who helped manage Google’s AdSense ad network for four years. “You have intent to buy a specific thing, you’re searching for that thing, you find something that matches that, and you go and buy it immediately. Upper-funnel is when you have something like an automobile, which you buy once every seven years, but during those seven years you are, through a bunch of conscious and unconscious interactions, making up your mind about what automobile to buy.”

“Mid-funnel is where, based on seeing a marketer’s message, you don’t take an action immediately, but you do something that then compels you to take action. Direct mail catalogs are a good example of that. When you get a piece of direct mail in your mailbox, but you probably go a few days later to the store — say Bed, Bath and Beyond — and buy it.”

The term “mid funnel” is heard more and more around Facebook’s offices these days because the company believes it’s in a great position to influence people who are seriously interested in a brand or in a specific purchase but have not yet made a decision to spend their money.

In an interview earlier this month, Rajaram identified several Facebook advertising channels, all still in development or recently deployed, that are ideal for advertising consumers in “mid funnel” on their way to a purchase:

  • ”Offers” coupons: Now in beta, Facebook Offers put a viral spin on the age-old notion of the coupon. Under the program, e-coupons are offered to Facebook members who are “fans” of a business’s Facebook page. When a fan claims a coupon, a message is distributed to the fan’s friends, who then become eligible to claim the offer themselves. Business “fans” have been clamoring for a coupon feature like this, but it turns out the majority of coupons are claimed not by fans but by friends of fans – new customers, in other words.
  • Easier promoted posts: Typically, a business’s first interaction with Facebook is to create a free Facebook Page, which customers can click on to become “fans” and receive updates. A fan sees an average update message from a business only about 10 to 20 percent of the time in his or her cluttered news feed, but businesses can pay Facebook for top billing and get seen by 80 to 90 percent of fans.The functionality was rolled out earlier this year, and this summer Facebook began offering it in a popup menu right next to where the business owner types his or her page update. That interface made a big difference, and Facebook is now planning a whole series of other lightweight ad-related products, including a “Pages Manager” app that will let business owners post updates from smartphones.
  • Mobile sponsored stories: Sponsored stories have been a cornerstone of Facebook’s ad strategy since they were rolled out last year. They allow advertisers to take a Facebook user’s mention of a brand and it make it stickier and more visible to that person’s friends. This spring, Facebook began testing a version of the system targeted at users of Facebook’s mobile app, and Rajaram says the results have been promising. Some of the heaviest users in initial trials have been makers of mobile apps, who want to highlight when your friend does something like, say, uploading a video using the app-maker’s software. Facebook believes app makers will pay $1 to $3 per install, or even more in the case of e-commerce apps.
  • App recommendations We couldn’t get any confirmation from Rajaram, but Facebook will reportedly soon begin recommending iOS and Android apps to people in the news feed within the Facebook mobile app. The recommendation would be paid for by an advertiser, as with mobile sponsored stories, but in this case the recommendation will come not from a friend but from Facebook, which will choose new apps for you to try after examining what other Facebook-enabled apps you’ve used and which apps your friends have used. It’s a potentially lucrative market: Across iOS and Android, there have been 50 billion app installs in the last five years alone.

Those are Facebook’s initiatives for the “mid funnel.” It also has some interesting plays in the “low funnel,” much closer to customer purchases, like Facebook Exchange, which lets advertisers track down users who have, say, abandoned an online purchase elsewhere on the web and try to convince them, in a Facebook ad, to finish the transaction. Facebook Exchange is in alpha-stage trials and, “There are many, many people chomping at the bit to be let in,” Rajaram says.

He’s also optimistic about Karma, a startup Facebook acquired in May that encourages people to buy gifts for their friends when their Facebook activity suggests they have had a birthday, started a new job, or changed their relationship status. Facebook plans to expand the scope of the app, including bringing it to the social network’s desktop interface.

What ties Facebook’s advertising efforts together, in Rajaram’s eyes, is that they take activities that are native and natural to Facebook users and amplify them, and make the quarter of Facebook given over to advertising as compelling as the other 75 percent. “We always think about, how can Facebook add that extra social, viral dimension to advertising,” Rajaram says. “We always think about stories and how, it’s not just businesses communicating to people, it’s businesses communicating with their loyal lists of fans and how then those fan’s interactions with that message can lead to their friends being impacted.”

For Rajaram it’s like coming full circle, back to the job he had at Juno back in 1997.

“We used to target people based on their demographic information, self-supplied,” he says. “And voila, we are on Facebook and people are again supplying us with a lot of interesting information about themselves and we use that in part to show relevant ads to them.

“After Juno, after Google, I think Facebook is redefining not just advertising, but marketing at its core. Marketing, from generations on, has been people talking to each other and telling each other just in day-to-day life what to buy.”

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