The average price of an ad on Facebook increased 18% in 2011, the social network noted yesterday in its S-1 filing that announced its plans to go public. That price hike helped the social network generate roughly $3.15 billion in revenue from ads last year, a 68.4% jump from $1.87 billion in 2010.
Facebook sells ads in a variety of ways. There are self-service formats that marketers can select themselves. The social network’s sales team sells other ad formats and a third group of ads are sold via an auction system that enables marketers to indicate how much they are willing to pay for clicks or impressions of their ads; Facebook then places ads based on a formula that includes relevance as well as price per click. Clicks are when consumers click on an ad; impressions are when they see it.
For ads sold via that auction format, Facebook said that it increased the minimum bids for its advertising auction system in the fourth quarter. “This change caused a reduction in the overall number of ads shown and increased the average price per ad as a result of factors including the removal of ads with bids that were below the reserve price and some advertisers raising their bids in response to this change,” the social network noted in the filing.
The move, which Facebook said in the filing was aimed at reducing “the frequency with which low-quality ads are displayed to users” may have done just that, according to a report released today by Kenshoo Inc., a vendor of software that helps manage paid search and online marketing programs.
The report says Kenshoo’s customers’ spending on Facebook increased 109% in the fourth quarter compared with the third quarter; the report gave no dollar figures. While much of that growth likely is tied to the holiday season, it is a much bigger bump than the 27% quarter-over-quarter increase in paid search spending for Kenshoo’s customers’ spent during the fourth quarter. Kenshoo offered no year-over-year data.
Marketers spent more on Facebook ads because the formats are increasingly effective, says Aaron Goldman, chief marketing officer of Kenshoo. The vendor’s customers saw Facebook ad clicks increase 105% compared with the third quarter of 2011, a growth rate more than double the 47% increase in Facebook ad impressions.
“Brands using Kenshoo Social to manage Facebook ads saw impressive response rates leading to large increases in advertising spend that dwarfed paid search budget growth in the fourth quarter,” says Goldman. “We see these trends continuing in 2012 and beyond.”
Facebook’s future is reliant upon that growth continuing—and finding new ways to leverage the data that consumers share on the social network, says Nate Elliott, vice president, principal analyst at Forrester Research Inc.
The filing yesterday noted that the amount of consumer data Facebook has is rapidly growing, as Facebook members add 2.7 billion Likes or comments a day, an average of 3.2 interactions per user per day.
“Advertising on the social web is a significant market opportunity that is still emerging and evolving,” the social network noted in the filing. “We believe that most advertisers are still learning and experimenting with the best ways to leverage Facebook to create more social and valuable ads.”
Facebook noted that it presented 42% more ads last year than in 2010. That growth stemmed from more consumers joining the social network, as well as Facebook adding and tweaking its ad formats. For instance, the social network in November added to its Ticker a format called Sponsored Stories; launched in January 2011, Sponsored Stories enables companies to pay to highlight posts or actions that a consumer’s Facebook friend has made that relate to the advertiser. The Ticker features updates on what a Facebook user’s friends are doing at that moment.
One area the social network has yet to tap into is mobile advertising, which presents a significant growth opportunity given the large number of consumers who access Facebook on their mobile devices, says Rebecca Lieb, digital advertising analyst at research advisory firm Altimeter Group. The social network said yesterday it had 425 million active mobile users in December.
And Facebook is well aware of the potential of mobile ads. “We currently do not show ads or directly generate any meaningful revenue from users accessing Facebook through our mobile products, but we believe that we may have potential future monetization opportunities such as the inclusion of Sponsored Stories in users’ mobile news feeds,” Facebook said in the filing yesterday with the U.S. Securities and Exchange Commission.
Goldman will speak at the Internet Retailer Conference & Exhibition 2012 in a session entitled “How to turn dynamic inventory, seasonality and promotions into an SEM advantage.” Brian Walker, Forrester’s vice president and principal analyst, e-Business and channel strategy, will speak in a session entitled “Leveraging a commerce platform in the era of the anywhere, anytime, any device consumer.”
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