Facebook's IPO: Asking the Right Questions

  |  April 17, 2012   |  Comments

On Wall Street, each Facebook customer is worth $6.25. On Madison Avenue, that number is very different.

Customer data is the new currency of the Internet. There's no time like the present to make this point. The dominant issue in the Internet's timeline now is Facebook's initial public offering. Take away the hype, the personalities involved, and the overnight billionaires in the making and you have a watershed moment for marketers. The Facebook IPO is literally putting a value on customer data. Not the customer or the customer's value, but the customer's data. Unlocking the staggering amount of customer data within Facebook and other social media networks represents an opportunity to completely revolutionize how marketers gain insight and value from customers.

Let's start at the most basic level, which is the IPO itself. Facebook has reportedly set a goal of $5 billion as its initial capitalization. It has approximately 800 million worldwide users. If you want to break that down to initial market value per customer, that's $6.25. It's too basic a measurement for several reasons. However, it raises some interesting discussion points: Does it mean that Facebook's market cap should be tied to its total customers? Should it be tied to value per customer?

All of these factors will play into Facebook's future valuation. At the end of the day it will be about the revenue number and future revenue projections, even though some customers are worth more than others to Facebook. There is a difference between how Facebook plays to Wall Street, Main Street, and Madison Avenue. Yet all three are interconnected. Advertisers will look at customer value. Analysts will look at overall revenue. It is a complex ecosystem. A value chain that's unique to any business at this time.

For marketers, the unique factor here is that Facebook customer data can show levels of engagement. That is the key here, and it's one that has been overlooked by the general business press. In fact, the growth industry around social media measurement, and the application of intelligent analytics for social media, will be just as important as Facebook's quarterly report. Facebook has been occasionally referred to as a "structured virtual community that acts like a focus group," giving marketers customer-generated suggestions for improvement. Brands that are able to measure insights from social media customers are creating that new currency of insightful data. Analysts measure in dollars; marketers measure in terms of customer data.

Here's why. Let's go back to the $6.25 number. If I'm a movie studio that wants to market a vampire movie, a lot of the Facebook customers have no value. Customers who have "liked" vampires or "liked" other vampire movies have a higher value. Maybe they will go see this movie and even bring a friend. That's a lot more than $6.25 per customer. But I have to find them. Facebook's universe is open to companies that can find customers that have higher value. It is not an issue of advertising on Facebook; it's an issue of finding the right customers and engaging them in the right way.

"Like" therefore, does not indicate immediate value. Engaged customers mean value. Frequency of engagement, recency of engagement, those are the hard numbers that define affinity. The customer that goes to my vampire movie page every day for an update is engaged at a high level. "Share" that movie and you're on an even higher level. That kind of customer is worth a lot more than $6.25 to a marketer. That's the fuel that will drive Facebook's market value.

Now let's take it up one more level. The Facebook data on the vampire movie will most likely tell the movie studio that the most engaged users are girls between 11 and 17 who watch an above average amount of TV. Here's where Facebook data takes wing. Without breaching any current privacy policies, the Facebook data expands. Let's say the Facebook data shows, surprisingly, that these vampire fans are also avid watchers of "The Bachelor." This becomes a new opportunity for the movie company. Not only can they reach out to engaged fans of "The Bachelor," now they can go outside the Facebook network and enter "The Bachelor" website, TV program, and all its connected properties.

Customer data may be the Internet's currency. However, its value is supported by effective social media analytics. Just as a customer follows a web of friends and their affinity, marketers can do the same thing. They can "like" and follow even more effectively if they understand and gain insight into what all the activity means and where it can lead them in this ever expanding world. Defining "what is a Facebook customer worth?" is not the right question. Defining "how is this customer engaged?" is the right question.

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ABOUT THE AUTHOR

Dilip Venkatachari

Dilip is CEO and co-founder of Compass Labs. He previously led Google's mobile ads business and ran PayPal's risk and fraud management, financial services, and compliance. Dilip has co-founded and led two successful start-up companies -CashEdge and CommerceSoft - after stints at McKinsey and Goldman Sachs. Dilip has an MBA from the Harvard Business School, M.S. in electrical engineering from Rice University, and a B.Tech in electrical engineering from the Indian Institute of Technology, Madras.

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