TECHNOLOGY

Facebook Ads: Are You Paying More & Getting Less?

Demand has driven ad prices higher even as click-through rates dropped. Have you checked your Facebook performance lately?
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Get less, pay more may sound like a terrible business proposition (at least if you're the customer), but it can work... if there is enough demand for what you want, logical or not. Just ask look at Facebook advertising.

For example, if you bought a Facebook ad in 2011 you might have paid more and gotten less.

An analysis done by TBG Technology, which offers Facebook ad campaign management, suggests that in the U.S., click-through rates for Facebook ads dropped 2% between Q1 and Q4 of 2011, even as average cost per click (CPC) rates increased by 10% between Q3 and Q4.

Use cost per thousand (CPM) measurements and the price rise is even steeper. Average CPM rates were up by 8% between Q3 and Q4 across five major markets. Since Q1, CPM rates have increased 23%. (TBG didn't provide a separate U.S. market analysis as it did with CPC rates.)

In some other parts of the world, click-through rates increased significantly over 2011, which TBG thought was a sign that companies were creating more effective ads. Not that it made any difference in the U.S., with the click-through rate drop. CPC rates should have followed, but they didn't, which is probably a product of Facebook mania. The more demand, the higher the ad pricing goes.

So what has caused the performance dip here? Speaking to Online Media Daily, TBG CEO Simon Mansell chalked it up to Facebook adding a seventh ad spot to most of its pages. Users clicking on ads will typically only click one on a given page. All other things being equal, it means that marketers now have one more competitor for consumers attention and the chance of successful click courting goes down.

But before you decide that Facebook ads don't make sense for your business, take a break for some thought. First step is to analyze how effective for your business that Facebook advertising has been. What response are you getting from the audience? What's the conversion rate into paying customers? If you're not tracking that yet, time to start, because it's the fundamental step in learning whether of your marketing actually pays off.

Next, consider that on Facebook (or any other advertising medium), all industries are not created equal. The TBG graph below shows how such sectors as food & drink, beauty & fitness, and retail get higher click-through rates.

Part of smart advertising is doing your best to know what will work and what won't. Facebook clearly attracts certain types of audiences--as any advertising medium does. It takes research to understand the medium you're considering and experimentation to see what works and what doesn't. And it takes constant monitoring to know when what used to make sense no longer does.

Last updated: Apr 17, 2012

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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