Facebook Ad Rates Drop

    November 8, 2008

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?