Posted November 7, 2008 5:37 pm by with 35 comments

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Last week, we took a look at Facebook’s financials and wondered if the social networking giant is headed for financial ruin, despite—or even because of—118% worldwide growth, 32% US growth (monthly unique visitors). Many commentators argued that any company would be overjoyed with even 32% growth. Unfortunately, that kind of thinking is the exact thinking that has brought Facebook to this point—and now Facebook’s ad rates have fallen 50%.

AllFacebook reports that both the CPM and the minimum spend for some Facebook have dropped 50% since October of last year:

At the time Facebook homepage advertisements attracted a $10 CPM and required a $50,000 minimum investment. Since then it appears that Facebook’s ad rates have dropped significantly and the minimum ad spend has also dropped to $10,000.

Now, how could 32% growth in the US cause this? Of course, it’s entirely possible that it didn’t. But let’s take a look at the numbers to understand just how good—or bad—that growth rate is.

How can more than doubling your worldwide user base be a bad thing? Well, when you don’t have a solid plan to monetize some or even most of those users, when advertisers simply aren’t spending as much to reach those audiences—when the growth of your most potentially profitable audiences is outpaced by the growth of the audiences that are marginally or just plain not profitable.

The US is not the most profitable audience in terms of online advertiser spend per Internet user, as TechCrunch calculated earlier this year, but it’s among the top 5. So, because of sheer size and advertising spend per user, the US audience is an important monetary base for Facebook.

And yes, year over year, the US Facebook audience (in monthly unique visitors) increased by 10 million, from 31M to 41M, or 32%. The worldwide audience, on the other hand, more than doubled from 74M to 161M, or 118%.

This means that over that year, the proportion of Facebook users in the US went from 41.9% to 25.5%—a drop of 16.4 percentage points, or a drop of 39% percent in one of their most profitable markets.

So 32% growth isn’t always something to envy.

What can Facebook do to reverse this trend? I think the best route would be to work to increase their user bases and advertising revenue in other profitable markets at a rate proportionate with worldwide growth. The UK, Denmark and Australia actually have a higher average online advertising spend per Internet user, so increasing their user bases could help to offset costs by less profitable user bases. US growth and advertising, of course, would be good, too, as well as worldwide advertising.

What route do you think Facebook should take?

  • The big problem with Facebook’s Advertising is that users on facebook don’t buy enough to be profitable for advertisers to spend the amounts facebook is asking for.

    Google has had great success because it actually makes sense for companies to use AdWords because they make money using it. My experience with Facebook so far has been the opposite, and so I stopped using it.

    Facebook will only make money if the advertisers are making money.

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  • well my point is if MySpace can do it why can’t facebook?

    I think they need to restructure their organization. The current CEO should stay as founder and in place he should hire a more experienced individual in the place of CEO who will be able to play this things better.

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  • It is crazy when growth actually means that your prime percentages drop. Facebook is very popular, but maybe they should make their advertising a bit more accessible? On that note, isn’t it crazy how competition on keywords has driven up PPC costs?

  • that’s because people choose new kinds of social websites like plurking et cetera ..

    brandon alan scofield’s last blog post..Social security fund

  • Globalization does these odd things like cross subsidizing on its own momentum. You have to keep running to stay in the same place and end up with poor results in the bargain. Till non US markets can be made to use by paying for it, this phenomenon will continue.

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  • Agree with Dan Graham, Facebook will make money if the advertisers are making money, just like Google AdWords

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  • facebook not famous in my country ( thailand)

  • What I see is not necessarily Facebook failing to meet expectations rather, they are adjusting the marketing in order to grab that extra advertisement.

    Consider this… there are thousands of companies world wide that do not want to take the risk of $50,000 in an advertising investment. With $10,000 there are now more that will consider Facebook.

    I have read countless articles on monetizing FaceBook, MySpace, etc. and I have yet to see any marketing mix that truly capitalizes on the their users.

  • Whew, I’m hoping facebook drops their minimum investment to, say, $10… then I can get in on it 😉

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  • Facebook’s on the right track. They just need to be a bit more innovative.

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  • Seems that the financialists have a more of futuristic approach towards facebook!

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  • The cost per click needs to come down and the realization that facebook has to encourage the small players to come to their party, targetting the big spenders mainly in times of financial turmoil is not wise….I hear the Death Toll ringing for facebook as emerging more imaginative networking sites start to slowly creep up, facebook will turn around one day and realise its not an advertising platform but a place for meeting friends and family…. RIP facebook +

  • The fact is, Facebook has the traffic and so could easily sacrifice some of the traffic for profitability. They could heavily monetize the site using more and more ads. This may decrease the user base but it would push up revenue.

    Less server strain and more revenue would put Facebook on track. However, Facebook don’t want to put off users so need a way to monetize the site without losing useability. This is what’s difficult. Myspace have done it, so there’s no reason why Facebook can’t do it just as well, if not better.

  • Facebook is a fad. Founders should sell out while they can still get some $$. In 5 years, I bet the doors won’t even be open on this business.

  • facebook is very popular nowadays but then ad rates fall?! maybe they should restructure their organization or perhaps build some better plans in able to take good advantage of their fast-growing community..

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  • @Bainzy
    I agree with much of what you said, however, this doesn’t mean the end for facebook. Markets like social networking entirely depend on their user base. They are notoriously hard sites to start and require major funding to get them off the ground (and popular). I don’t think you will see facebook or myspace losing their lead anytime soon…

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  • Facebook is making the same mistake that many companies make, and it stems from arrogance. Making someone pony up to the tune of $50,000 for an ad is a bad business decision.

    Look at the way Google has done it. Google makes it affordable for pretty much anyone with a credit card to advertise over their service. In otherwords, Google targets smaller businesses. What often happens is that when a business grows using Google, they raise their advertising budget. I know of some businesses that started out with a $200 a month budget that are now spending $20,000 a month on Google Adwords.

    Facebook needs to go for small business and realize that the success of their small business advertisers is ultimately the success of Facebook. Facebook needs to concentrate on making small business owners profitable who advertise over their system. As those small businesses grow, so will their advertising budgets.

    Any company arrogantly snubbing its nose to small business and going straight for the big advertising dollars is a huge mistake. The only question now is will Facebook realize the error of their ways before it is too late, and that all depends on the corporate culture at Facebook.

  • I find facebook advertising to be pretty useless, the conversion rate is very low. Even though so many people use it, not many people look at the ads.

  • How much of this is correlated with the recent market downturn that has caused marketers across the board to scale back advertising spend? Have we seen a corresponding drop in rates on Myspace?

    It’s not hard to imagine the savvy Facebook user base learning over time to largely ignore ads.

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  • cat

    They don’t have to be affraid of fall they are too popular to bankrupt

  • I feel that Facebook users simply don’t spend enough to be anywhere near profitable..

  • The bulk of their market used to be teens and students, but thew biggest growth recently has been in the more adult market, so there is definitely some profit to be had there, Goran!

  • When it comes to online spend, i found facebook advertising to be pretty useless both their conversion rate and retention rate is very low. The question to ask, have you ever clicked on an ad on facebook, the answer is simply No. The model is designed around friends contacts rather than ad opportunities.

  • ‘savings’ in some why I agree with you. However we are the wrong people to ask. How many of us have actually clicked on a Google ad?

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  • Facebook and other social networks are on the decline.

    Users are becoming bored of being bombarded with apps and invites for the next big network which will no doubt flop.

  • totally agree with Saad Kamal. Zucherberg should stop playing with Facebooks future and hire an experiences CEO.

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  • I think its because FB advertisement is simply not as effective as other alternatives, having advertised on FB myself.

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    @cat, popularity doesn’t always come into it, many a good business has gone down. Just think how many people would have guess Enron for example.

  • Advertising on Facebook can work, but many people just ignore the ads unless they point to an internal page. The social networking and viral capacity of facebook ads is their strength.

  • I agree, increase the user based.

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  • facebook is very popular nowadays but then ad rates fall?! maybe they should restructure their organization or perhaps build some better plans in able to take good advantage of their fast-growing community..

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  • Jason

    Actually I did thought something like this will happen when Facebook
    rejected even the very first US$1bn offer from Yahoo. This 16 yr old
    founder is just too arrogant and he has no idea how difficult it is to
    actually make money in real life. He thinks money will just fall off the
    sky for him. I think he still thinks that way and I really wont pity him
    when one day Facebook is totally gone. Anyone want to bet? I say Facebook
    wont even last for another 5 years. People will just get bored of it
    because it’s the same thing over and over again. Yes you might have all
    your friends on Facebook there now. But new site will come out. Cooler
    site and people will all want to try new things. Then Facebook is doomed
    and Mark can go back to school. This time instead of taking up another
    tech degree/master, he should go and study something more commercial (eg:
    business). Then he should learn from it and when someone offers him US$1bn
    again, he should take it (most likely, in his next life).

  • Haven’t everyone’s ad rates dropped though? The key is to make sure they continue to make less than they spend. If they’ve forgotten that, then facebook deserves to go belly up.

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