Facebook to Spruce, AdParlor, Nanigans, TPG, etc: Share Your True Margins with Your Customers, It's the Law!
Published: August 26, 2011
Author: David Rodnitzky
A little birdie told me about a change to Facebook’s ads API development policy recently which reads as follows:
“You must, upon request, provide advertisers with a report on their ad spend, and your report must itemize how much advertisers spend on Facebook ads and fees for your service.”
There are several very successful Facebook advertising companies (most of which I named in the headline of this post) that charge clients on a cost per action (CPA) basis. In other words, they guarantee a conversion/sale/sign-up for a flat-fee and hope to make money on the difference between the amount they actually paid Facebook for the conversion and what they charged their client.
Depending upon how savvy the client is, this difference can be massive. Consider this hypothetical scenario: if a client buys 50,000 sign-ups at $5 CPA and each sign-up actually only cost the agency a $3 CPA, the agency is netting $100,000 a month in revenue from this client on spend of $150,000, or a 66% management fee! These days, a management fee of 15% is hard to come by for most agencies and anyone trying to charge 66% would probably be laughed out of a meeting.
My guess is that a lot of these CPA deals on Facebook have very high margins like this. Facebook’s policy now requires these Facebook agencies to disclose this margin – if requested by the advertiser – to their clients. Granted, few clients are likely to know that this policy exists (unless everyone who reads this post spreads it far and wide . . .), but any client that actually does make this request might be shocked – to the point that they either cancel their relationship with the CPA company or immediately demand a major discount off their CPA.
Facebook could decide, of course, to be much more aggressive with this policy and require agencies to disclose the differential between the CPA and the actual cost to acquire a customer, though I’m not sure how they would really enforce this. Who knows, this initial change in the terms may just be a first step. Facebook realizes how much money they are losing to these agencies – forcing agencies to disclose this info will likely result in lower margins for the agencies, which means a higher percentage of overall marketing investment going to actual Facebook advertising over agency profit.