How Facebook's Ad Prices Collapsed in Q1 2012

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Photo: Illustration: Ellis Hamburger

In Q1 2012, something interesting happened to Facebook’s ad sales: the social network was suddenly unable to charge the high prices for its ads that it used to.That price collapse could cause a more modest increase in Facebook’s Q1 2012 overall revenue than the media are expecting.

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For instance, Facebook’s CPC—or cost-per-click on an ad—fell from about 62 cents in October 2011 to about 45 cents in February 2012, in some territories. That’s a price collapse of about 27 per cent, according to data from AdParlor, which creates and serves ad campaigns on Facebook.

AdParlor’s data is based on a sampling of 1 billion daily ad impressions served on Facebook since January 2011. Facebook’s CPCs today are still greater than what it could charge back in 2011, but on a month-to-month basis prices suffered an intense collapse in January and February.

That collapse doesn’t mean Facebook earned less money. Facebook’s total ad revenue over the period has grown nicely, quarter by quarter, to nearly $1 billion in Q4 2011.

Rather, it appears to show that Facebook has sacrificed high prices in favour of greater volume.

At the end of last year and the beginning of 2012, Facebook increased the amount of display ads showing on each page from one or two to as many as seven per page. As that move occurred, the prices Facebook was able to charge its advertisers collapsed.

The following charts are unusual: They show Facebook’s prices in actual dollars, and not percentages—the usual way Facebook’s ad sales data is given to the media. The charts show quarter-by-quarter, and month-by-month, prices that Facebook charges per CPC and per CPM (that’s cost-per-thous and impressions, the money advertisers pay for their ads to be shown).

The charts don’t account for volume or total dollars—meaning that even though Facebook prices are going down, the total revenue it’s collecting may be going up. Nonetheless, they are fascinating because they show how Facebook’s ads drastically and quickly change price with supply and demand in the market, and as the company’s strategy changes.

To understand these charts, you’ll need to know these definitions.

  • CPM—or cost per thousand ad impressions—is the money Facebook charges for serving ads on users’ pages.
  • CPC—or cost-per-click—is the money advertisers pay for any user who clicks on an ad.

In general, high CPMs indicate high advertiser demand for Facebook’s space.

CPCs by quarter: Prices for advertisers fell off in 2012, indicating it was easier to find users willing to click through ads.

A lot of the spike in Q4 comes from the holiday shopping season rush, when advertisers and media buyers most want to reach consumers, according to Hussein Fazal, CEO of AdParlor. '90 per cent of impressions and revenues come from 10 per cent of clients,' he says, so supply and demand is sensitive.

CPCs by month: Similarly, in March, CPC prices rose—indicating it was harder to find users wanting to click on ads.

Fazal believes that advertisers essentially took a break in January and February and came back to the market in strength in March.

CPMs by quarter: Note the weakening Q1 performance in France and Germany.

In Q4, Facebook began an experiment: Increasing the number of display ads from one or two per page to as many as seven. The increase in inventory supply coincided with a decline in Facebook's CPMs.

CPMs by month: Prices fell in January and February but rose in March. CPMs were still below the year-before numbers, however, except in the U.S.

The fact that Facebook's overall CPMs remain below its year-on-year numbers suggests either that Facebook has sacrificed premium prices for greater volume, or that its market is maturing and softening. 'They would have expected more of a percentage increase in revenue in Q1 than they're going to see. That's what I feel,' Fazal says. 'I think the growth won't be as steep. That's pure speculation.'

Game CPCs by quarter: ads in social games form a majority of Facebook's revenues, AdParlor says.

Game CPCs by month: prices today are higher than a year ago but down from Q4.

Game CPMs by quarter: Down across the board.

Game CPMs by month: You can see the pronounced trend here.

Now for some perspective on Facebook's click-through rates ...

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