Facebook Exchange: A New Way For Advertisers To Target Specific Users With Real-Time Bid Ads

Facebook is testing and will soon launch Facebook Exchange, a real-time bidding ad system where visitors to third-party websites are marked with a cookie, and can then be shown real-time bid ads related to their web browsing when they return to Facebook. This retargeting option could be a huge money maker for Facebook as it will allow for more relevant direct advertising — for example a travel site could serve ads about a flight to Hawaii to someone who almost bought a flight on their site. Advertisers might pay big premiums for highly-accurate targeting.

Users will be able to opt out of Facebook Exchange via third-party demand-side platforms, but they can’t opt out of the program completely from within the social network.. Facebook just notified TechCrunch that Exchange is currently in testing with eight advertising demand-side platforms, and it will become more widely available in the next few weeks for traditional Facebook sidebar ads charged at cost-per-thousand-impressions, but not Sponsored Stories or mobile.

The demand-side platforms currently testing Facebook Exchange are: TellApart, Triggit, Turn, DataXu, MediaMath, AppNexus, TheTradeDesk, and AdRoll.

Here’s how Facebook Exchange works:

A user visits a travel site that’s hired a DSP rigged up with Facebook Exchange
A cookie is dropped on that user’s computer, typically when they’ve shown purchase intent
If the user fails to make a purchase, or the advertiser wants to market to them more, the DSP contacts Facebook and gives them the user they wish to target’s anonymous User ID
The advertiser pre-loads creative for ads that would target that user
When the user visits Facebook it recognizes the cookie dropped by the DSP
The DSP is notified and allowed to make a real-time bid to show the user ads
The DSPs with the highest bids get their highly-targeted ads shown to the user
If the user disapproves of being shown the ad and ‘X’s it out, they’re shown a link to the DSP where they can opt out of future Facebook Exchange ads

Facebook’s Annie Ta tells me the idea behind Exchange is to let advertisers show users more relevant ads. To date, Facebook has been generally viewed as a home for institutional or brand advertising. However, it’s seen as much less useful to direct marketers than search ads because users on Facebook haven’t shown purchase intent as when they search for a related keyword on engines like Google.

Facebook Exchange could change all that.

For example, Ford could drop a cookie on a user who looks at the new Escape SUV on its website, but doesn’t request a local quote. Then Ford could bid to show that user ads stating “Ford Escape: Just $21,000″. These would be much more relevant than generic Ford ads showing sedans or trucks that the user might not be interested in. And Ford would likely be willing to pay a high price to reach that qualified lead.

However, Facebook may be cashing in some user trust in exchange for this new revenue stream. While cookie-based ad retargeting is common across the web, and Facebook will not allow advertisers to combine cookie retargeting with the with the extensive biographical, social, and behavioral data Facebook has on its users, some people may be uneasy about Exchange.

They will be able to use a third-party opt-out on the sites of demand-side platforms to stop receiving the cookies. However, Facebook tells me it will not be offering users a way to deny the social network the ability to target them based on those cookies.

If investors were looking for clues as to how Facebook could ever get to the $104 billion valuation it IPO’d at, Facebook Exchange should excite them. It shows Facebook is willing to shift towards slightly more aggressive advertising mechanisms. And for users who aren’t overly-worried about privacy, Exchange means the ads they see could be for things they actually want to buy.