One Of Facebook's Advertising Partners Has Quit Because The Margins Were Lousy
Compass was one of Facebook's "preferred marketing developers" (PMDs). The exit ought to scare some of them. Venkatachari tells us that his company saw only "diminishing margins" in the Facebook ad business:
We decided to shift focus away from Social Ads, and towards leveraging rich insights for Marketing. That shift started several months ago, when we dropped the Managed Ads business, and we finally exited the rest of the Ads business recently.
Rationale: While the spend on social ads is growing and will continue to grow rapidly, the intermediaries (i.e. PMDs) are not structurally positioned to get attractive returns. Facebook (and Twitter next) will continue to get an increasing share of the value, leaving intermediaries with diminishing margins. As a player with marquee customers, we got a ringside view of this trajectory. Insights and Marketing Intelligence, on the other hand, is an attractive, growing market
Compass's clients included Honey Bunches of Oats and Febreze. It was one of the smaller Facebook PMDs, with 25 employees. But it had taken $12 million in venture capital investment prior to its change in direction.
There are about 300 preferred marketing developers in the Facebook ecosystem. Facebook recently shifted policy to incentivize more of them to get into the ad placement business - the very line of work Compass says it cannot make money at.
Those 300 partners all perform one (or more) of four functions on Facebook: Placing ads for clients, running clients' Facebook pages, analytics and app creation. With so many companies competing to serve advertisers on just four tasks, it's unsurprising that not every company is going to find the margins they want.
We're not saying all Facebook PMDs have the same problems. Many of them, obviously, have growing books of business. But there have been some other signals recently that not everyone placing ads on Facebook will come out ahead.
Another Facebook PMD, Syncapse, recently went bankrupt.
And Marin software, which offers a range of adtech services including social media marketing on Facebook, raised less money in its recent IPO than the total its investors put into it. (To be fair to Marin, its revenue is growing robustly even though it is not profitable.)