The price of Facebook ads could almost double in 2018. Is this gold acquisition channel drying up? Should you stop your campaigns and switch your advertisements to another network? Do not panic, we explain here the reason for this increase and what it implies for your use of Facebook Ads…
In a previous article, I wrote that the prices of Facebook Ads will increase. I would like to explain more precisely why and make the link with the financial results announced by Facebook in early February.
How Facebook is making money today
Here is a simplified diagram of Facebook’s business model:
Turnover (Revenue) depends on four factors:
- Number of active users (Active Users): the number of people who use FB each month;
- Time spent (Time Spent): the average time spent by each user on FB;
- Advertising density (Ad Density): the average number of advertisements seen by each user on FB;
- Advertising prices (Ad Price): the average price paid by advertisers to advertise on FB.
Until now, Facebook’s revenue growth has been driven primarily by growth in the number of users, time spent (hence the focus on video) and advertising density.
Record financial results
Let’s come to the results announced by Facebook last Wednesday. These are, as always, record results:
- 2017 revenue: $ 40.6 billion (+ 47%);
- 2017 net profit: $ 16 billion (+ 56%);
- Active users (monthly): 2.1 billion (+ 14%);
- Active users (daily): 1.4 billion (or 2 users out of 3!);
(for full results, it’s here).
I am not a financial analyst so I will not dissect their results, but I would like to emphasize a few points which I think are important in this announcement and which will help us understand why the price of advertisements will increase.
1. Time spent on Facebook has decreased by 5%
That’s 50 million hours less a day, or about 2 minutes a day per user less.
It’s no surprise, Zuckerberg had announced on January 12 that it would be a direct consequence of the change in priority of the algorithm (“Now, I want to be clear: by making these changes, I expect the time people spend on Facebook and some measures of engagement will go down. But I also expect the time you do spend on Facebook will be more valuable.”) .
It goes in the direction he wants to give Facebook in 2018: less focus on time spent (“Time spent”), what matters is the quality of the time spent (“Time well spent”).
2. The price of advertisements increased by 43%
Facebook CFO David Wehner announced that the average price per ad increased by 43% and that the number of ad impressions increased by 4% (note that a year earlier, it was almost exactly ‘reverse: the average price per advertisement had increased by 3% and the number of advertising impressions by 49%).
What does that mean ?
That the advertising inventory (the number of ads that Facebook can display to its users) hardly increases any more while there are always more advertisers on the platform (6 million to date), which mechanically pulls the price up.
3. Facebook lost users in North America
Other notable information: for the first time, Facebook has lost users in the US / Canada, a sign that the North American market has reached maturity and will have to be relied on less to generate growth.
The number of users continues to grow in other markets, but much slower than before.
4. Income per user in Europe far behind USA / Canada
Finally, in the USA and Canada, each user reported to Facebook $ 26.76 to 4e quarter while in Europe it’s $ 8.86.
There is therefore a BIG room for growth in advertising revenue per user in Europe.
Now back to the Facebook business model.
If the number of users increases slightly, if the time spent decreases (therefore fewer opportunities for advertisers to reach users) and if the advertising density stagnates, the only real lever for growth is … the price of advertising.
Some estimates indicate that the price of advertisements could increase by 25% in the next 3 months, by 48% in the next 6 months and by 79% in the next 12 months.
Does that mean you have to stop your Facebook Ads campaigns?
Given the power of targeting and the quality of formats, Facebook Ads will remain profitable for performance marketing, i.e. campaigns Bottom of Funnel (the bottom of the sales tunnel, either conversion, sale or lead generation campaigns).
However, if your campaigns are limited to Top of Funnel (at the top of the sales tunnel, that is, awareness, branding or awareness campaigns), the price increase may make the cost of Facebook Ads prohibitive for campaigns that do not have a clear ROI objective. In this case, you should stop considering Facebook only as social media but rather as an acquisition channel (of users, prospects … or customers).
Original article published on the Neomedia blog