Is Facebook Advertising Too Expensive?

02 Aug, 2011, by Carla Burgess

facebook-advertisingThe costs of advertising on Facebook are escalating, and escalating fast.

A recent study found that the price of display advertising, purchased on a cost per thousand basis, had grown 45% in Q2 on the same quarter last year. The inflation on ads sold on a cost per click basis was even worse – up 75% on the same period last year.

So what’s happening?

It’s a classic case of demand and supply.  As studies reveal the value of Facebook fans to brands – a prime example being the recent findings from Hitwise that each Facebook fan is worth 20 additional visits to a brand’s website  – marketers are getting increasingly interested in building their followings.  One of the most effective ways to build a fan following is to advertise on Facebook – demographic, geographic and competitor fan targeting means brands can be very precise about who sees their ads.  Hence more brands are diverting funds into the world’s leading social network.  It’s estimated that 30% of overall online display ads are served by Facebook and that proportion is only going to grow.

And this ad price inflation is only going to get worse. As Facebook user growth slows in the UK – inevitable as penetration reaches saturation point – the level of inventory, or supply, available to advertisers will continue to stagnate at the same time as demand, in the form of advertising spend, is growing fast.  When supply is fixed and demand is growing, there’s only one way that price to go.

So is Facebook advertising getting too expensive for premium and luxury brands to consider?

In our view, not yet. When comparing the cost of Facebook advertising with other online display advertising options in known premium environments, such as online magazine sites, it’s still a relatively cheap option. And the value of recruiting a new Facebook fan – in terms of engagement, word of mouth potential and incremental traffic – still exceeds the cost, we believe.

Will this change in the future? Perhaps, but it will take considerable inflation before Facebook advertising becomes poor value, even more so for the most cost effective formats such as Sponsored Stories.

However, clearly the amount of spend that Facebook is swallowing up – estimated to be 18% of overall display ad spend in the US by the end of this year – has the potential to put them in a dominant position which could be unhealthy for advertisers in the long term.  Facebook could be challenged if Google+, which has grown rapidly to over 20m users, and Twitter, which is making determined efforts to broaden it’s user base, can grow to be credible rivals. However, they’re both big ‘ifs’.