The cost of placing ads on Facebook is rising rapidly as more big brands begin to move their television and print spending on advertising onto the world’s largest social network, two recent reports have revealed.
The “cost per click” of an ad placed on Facebook has increased by 74 per cent over the last year in four of the world’s largest media markets, according to TBG Digital, an independent marketing firm specialising in social media.
The price of display advertising, charged per thousand “impressions” or ads seen, rose 45 per cent year-on-year, across the US, UK, France and Germany in the second quarter, TBG found.
Facebook’s dominance of the social networking market and rapid growth in advertising revenues have prompted comparisons with Google.
“In my experience of digital advertising this is the biggest growth that we have seen since Google,” said Simon Mansell, chief executive of TBG. “The main difference is that this is being fuelled by brand spend rather than [direct] response spend. That is an inflection point for the whole digital marketplace.”
TBG’s report, based on analysis of 200bn ad impressions from 167 clients in the three months to June, follows a similar global study by Efficient Frontier, another digital marketing firm. Efficient Frontier found that cost-per-click ads increased by 22 per cent in the second quarter of 2011 compared with the first.
“Over the year, we expect [Facebook advertising spending] to have grown by 80 per cent from last year,” said Jonathan Beeston, global marketing director at Efficient Frontier.
Advertisers that have long held off spending more than a tiny fraction of their marketing budgets on the web are now diverting funds from traditional media, Mr Mansell said. They include food and drink advertisers such as Coca-Cola, owner of the most popular branded Facebook page with more than 32m fans, as well as retailers, entertainment groups and automotive brands.
The figures come as Facebook gears up for an initial public offering, expected before spring 2012. The company has increased its efforts to win over the advertising industry in recent months, creating new ad formats and creating a “client council” to advise it on how best to market to its global audience of 750m.
Large agency groups are taking an increasing interest in Facebook, with Publicis Groupe on Monday taking a majority stake in Big Fuel, a social media specialist in New York.
The pricing of most Facebook ads is determined partly by auction and partly by the social network itself.
Facebook sets a minimum rate depending on how an advertiser targets users – such as focusing on location, age or interest. It then sets a final price depending of the number of competing buyers for the same ad slot.
According to a study by Webtrends this year, Facebook’s average click-through rate for an ad was 0.05 per cent of people who saw it in 2010, at an average cost per click of $0.49.
On Monday, Facebook’s self-service advertising system recommended setting a price of 68p per click for an ad targeted at all 26m UK users aged over 18.
Demand for Facebook advertising is increasing faster than the supply of ad space on the site, as big brands’ interest grows and the rate of new users joining the site slows in developed North American and western European countries, which some analysts believe are nearing saturation point.
“They have an awful lot of inventory but there is increasing demand for it, so prices are going to go up,” said Ian Maude of Enders Analysis. “It’s a similar story to the early days of [Google’s] AdWords.”
In spite of the rapid price rises, advertising on Facebook is “still very cheap compared to other online media”, Mr Maude said. Click-through rates on Facebook ads, while rising, have historically been little better than a traditional banner advertisement.
“You’ve got an increase in brand-type spend and an increase in pricing, even though there is a big increase in supply,” Mr Mansell said. “When their IPO happens people are going to be surprised how well they are doing.”
There is an intensifying rivalry between Google, the largest online advertising company, and Facebook for users’ time and data about their online interests. Google’s new social network, Google+, attracted 10m users in its first few weeks.
Growth in spending on social media will outpace that of search this year, Efficient Frontier predicts, although only a small proportion of search-marketing budgets are being redeployed into Facebook, whose estimated advertising revenues of $2bn last year lag far behind Google’s $28bn.
Google+ does not yet carry advertising, which could put greater pressure on Facebook to ensure users do not find its ads too intrusive, Mr Mansell said. “If Google+ does have success, it would be good for [Facebook] to have a competitor because at the moment they are a little bit of a monopoly,” he said.
Facebook declined to comment on the forecasts.