How the social media advertising machine works

How the social media advertising machine works

It’s no secret that all major social media platforms are underpinned by an advertising-based business model, but have you ever wondered how it all works? You may have heard of it described as “surveillance capitalism,” but what exactly are they surveilling?

In this post, we aim to provide an overview of how the advertising-based model works on social media.

In the simplest terms, in an ad-based business model a social media platform sells targeted advertising space to brands and then delivers or “targets” those ads to relevant users using all the data the social media platform has about its users. This begs the question, how do they know who to target? 

Step 1: Data collection

In order to target ads, social media platforms need to understand who you are as a user. To do this, they collect a tremendous amount of data on you including: who you are, what you do, where you go, and who you interact with. All of this data paints a very detailed picture about you. This is the “surveillance” part of surveillance capitalism. The data they collect falls into four major categories for the most part:

Actions you take on the platform (e.g., what you do on Facebook or Instagram) 

  • This includes accounts you follow, content you like, ads you click on, your location when using the service, who you communicate with through the service, and information you provide (e.g., name, birthday, email, phone number).
  • Most of this data is collected by default to improve user experience and for account creation purposes.

Your activity across the internet (e.g., what you do on the internet when you aren’t using social media)

  • This includes websites you visit, apps you use, and the amount of time you spend on those websites and apps.
  • You generally have very little control over the tracking of these activities (outside of iOS 14.5+ which now allows you to restrict cross-app tracking).

Your activity in the real world

  • This includes where you are currently, where you have been, and (to the extent possible) stores you’ve visited.
  • This data may even be collected in the background when you aren’t using the app depending upon what you’ve consented to.
  • Platforms may also purchase data from 3rd party data brokers to enrich their data sets.

Information shared by advertisers 

  • Advertisers can upload contact information, such as emails, that they have collected from customers and use that to target those customers (e.g., email addresses from rewards programs).
Step 2: Ad targeting capabilities

Once the raw data is collected, it’s used to create a profile on you. Some attributes are as stated or shared by you (e.g., age, location, actual interests), while others are inferred based on your behavior (e.g., ethnicity, tangential interests, lifestyle, income level). (See “Learn More” below for instructions on how to see what data platforms have about you).

Platforms use these profiles and the multitudes of data points they collect on users to create ad targeting mechanisms for advertisers to utilize. Advertisers can’t necessarily see your profile specifically, but can target specific attributes which when combined with other attributes result in you being in the “target audience” (e.g. people into yoga that enjoy romantic comedies and live in Miami aged 25-40). 

Social media platforms offer a variety of targeting types, we’ve listed a couple here to give you a sense of their targeting capabilities:

Behavior targeting - based on your behavior on and off the platform

  • Affinity/Interest targeting - Let’s say you spend a lot of time looking up food recipes, watching makeup tutorials, or sports highlights, advertisers can target you based on that behavior/interest. This sort of targeting can also include targeting based on political and cultural affiliations.
  • In-market targeting - Assume you’ve been looking up reviews for TVs recently, then TV manufacturers can target you with ads as you are potentially “in the market” actively looking to buy a TV soon.
  • Remarketing - A brand can target you with ads because you’ve interacted with their ads, website, or products previously.
  • Life events - You can be targeted if you are coming up on a major life milestone (e.g., graduation, moving to a new house or city, change in marital status, having a child).

Demographic targeting - based on basic demographic information (age, gender, income level, education, job title, employment status, etc.) 

Location targeting - based on your current geographic location

Connection targeting - based on accounts you follow on the platform

Contact list targeting - based on contact information uploaded by an advertiser (e.g. you joined a brand’s rewards program with your email, they can upload your email to a platform such as Facebook and then specifically target ads to you since Facebook knows that email is linked to your profile)

The targeting types mentioned above are not an exhaustive list. To get a more tangible sense of how granular and specific targeting can get, check out the ads Signal (a privacy-focused messaging app) recently tried to run on Facebook.

Note, different social media companies may refer to similar targeting types with different names. The names mentioned above are a mix of verbiage used by Facebook and Google - we've included the links below if you're interested in digging deeper into their targeting offerings for advertisers.

Step 3: Selling ads to advertisers

Once a platform has the requisite data and targeting capabilities, it can sell targeted ads to advertisers. 

A common misconception is that these platforms sell data to advertisers - this isn’t the case. The platforms don’t sell your data - it’s their most valuable asset. Giving that away would undercut their entire business. There is much more money to be made by selling highly targeted ads using the vast amount of data they collect. For instance, Facebook made on average $18 / month per user in North America in Q4 of last year, as detailed in their 2020 Annual Report (pg 56).

Ads are sold with a variety of different pricing mechanisms available for advertisers to choose from, such as cost-per-thousand-impressions (CPM), cost-per-click (CPC), cost-per-day (CPD), coupled with additional charges depending upon how targeted the ads are. Most platforms have self-service offerings for advertisers to buy and manage their ad buys.

Now that you have a better understanding of the ad-based business model which underpins social media, feel free to share your thoughts, questions, and comments with us. 

If you’d like to learn more, check out these links:

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