1. Why do advertisers continue to post ads on Facebook, even though the click-through response rate is so low?

2. How does Web advertising affect consumer behavior? Does it help build customer relationships or not?

With 400 million members, Facebook is a global social network of unprecedented size—and untold potential revenue. Users are familiar with the advertisements in the right-hand margin of certain pages. Some big names, such as Walmart and PepsiCo, post ads, but so do many smaller companies. What users may not realize is that advertisers can use members’ personal information—age, location, interests, level of education, and connections within Facebook—to refine the targeting of ads. For example, women who change their relationship status to “engaged” will suddenly start seeing ads from local caterers, planners, wedding-gown stores, photographers, and so on. In contrast, Google uses keywords and search histories to target ads.

Facebook recently surpassed Google as the most visited site in the United States. Eager to reach Facebook’s much larger membership, advertisers are switching from Google to Facebook, which some predict will earn $2 billion from global advertising. One study found that 78 percent of Facebook users return to Facebook to see more news stories; only 67 percent of Google News users do so. Facebook traffic is up 185 percent; Google is up only 9 percent.

Facebook’s “self-service” ads usually appear on a user’s profile page and consist of a small photo and some text. An advertiser establishes a daily budget—there is no minimum—using Facebook’s ad-creation tool. When the advertiser has spent the day’s entire budget, Facebook stops running the ad. If money is left over, the advertiser can roll it over to the next day’s budget. Advertisers pay either “by impression,” every time a user views the ad, or “per click,” every time a user actually clicks on the link in the ad to open the company’s Web site. Facebook members can become “fans” of an advertiser’s

Facebook page or can reply to an invitation to a company-sponsored event through Facebook. But as in other media, consumers have a deep mistrust of Web advertising as a credible source of information. With ads on Facebook becoming omnipresent, click-through rates (CTRs) have fallen to about 0.3 percent from close to 3 percent. Of course, the point is to get people to look at the ads, which most users ignore. When promoting a contest, one advertiser found that humor—and pictures of cute puppies and kittens—increased his CTR even more than did offers of prizes.

Some Facebook users find the ads off-putting—or worse—because advertisers can target them so precisely. But Dan Rose, the vice president for business development at Facebook, predicted that the quality of the ads would improve as more companies use the system.

Facebook requires the text and photo in an ad to be relevant to what is being advertised. However, Facebook does not review ads before they are posted. The only review system is user feedback. If a user reports an ad as misleading, offensive, uninteresting, irrelevant, repetitive, or “other,” Facebook deletes the ad from that user’s page. The more people ask for an ad to be removed, the less likely Facebook is to allow it be posted on other people’s pages.

Some observers predict that Facebook will transform Web advertising and even the advertising industry itself. Facebook’s “Connect” technology allows members to take their social networks with them as they browse the Internet. And just as in the real world, in the virtual world people are much more likely to value the opinions of their friends more than those of people—or advertisers—they don’t know.