Facebook introduces new advertising program based on users’ status updates

Facebook is ramping up its advertising efforts with a new word-of-mouth feature that will take status updates where users “check in” to a location using a business name and place them in a special advertisement that will appear on their friends’ profiles.

The announcement also comes as Facebook has said that every application and game available on the social network will be forced to use the site’s own credits system, in a move designed to drive up revenue ahead of a likely IPO in 2012.

Facebook’s new feature, “Sponsored Stories”, works by having businesses sign up to the program. Then, whenever a Facebook users “checks in” to a location that features their business name, that information is shared with that users’ friends.

The move to leverage these status updates is a testament to growing power of location-based marketing. For months now, researchers have been saying that social networking recommendations among friends are far more powerful than reviews or other types of ads.

In the new program, a box will appear on their profiles featuring the word “Sponsored Story”, and below it will have the user’s status update, and then a link to that particular business’s website.

Facebook has said that businesses wanting to be a part of the program will need to sign up, but the cost is unknown at this stage.

Facebook says the system leverages the power that personal recommendations have over traditional advertising.

“Companies and organisations are already seeing the benefits of marketing that includes people and their real friends through our core ads product – more effective, more engaging and more personalised marketing,” the site says.

“Like News Feed, it’s just another way to share and see what your friends are doing. Some actions people take with companies, products or apps on Facebook, will appear not only in the News Feed, but also as Sponsored Stories on the right side of the page.”

The system is a type of sponsored word-of-mouth marketing, but relies on businesses having a presence on Facebook’s locations feature.

While some Facebook pundits have already pointed out that users will be unable to opt out of seeing these types of ads, the site counters that by saying the information being used are only status updates that have appeared on news feeds anyway, and the update won’t be used outside of Facebook.

However, it is still unknown how Facebook will differentiate between negative and positive status updates. An Australian spokesperson was contacted for comment this morning, but no reply was available before publication.

“A Sponsored Story may also appear on my friends’ profile or homepage with the same check-in story. This creates another way for businesses to drive predictable word-of-mouth marketing between friends at scale.”

Meanwhile, Facebook has also said that it will force game developers to use Facebook Credits for purchases from July 1, and will provide incentives to those who start switching over early.

The announcement comes as the popularity of Facebook games has exploded over the past year, with millions of people now logging on every day to play game such as FarmVille.

However, some developers have kicked up a fuss, which is why Facebook has said that it delivered the news early in order to have discussions with developers about the change.

But the real reason for the switch here is revenue. Facebook needs as much as it can get, and with a 30% commission from all payments made using Facebook Credits, making the switchover mandatory will potentially mean a lot of money will be flowing into the site.

Analysts suspect the company will announce an IPO for April 2012, thanks to a remark in the company’s filing last year which stated that “even before the investment from Goldman Sachs, Facebook had expected to pass 500 shareholders at some point in 2011, and therefore expects to start filing public financial reports no later than April 30, 2012”.