In theory, advertising on Facebook allows marketers to reach one of the largest populations of potential buyers possible. Short of throwing up a banner ad on the moon, it’s unlikely that you’re going to find an outlet with more upside – the network is approaching 1 billion users.

In theory.

But of course, unlike a Super Bowl ad or the like, not everyone in the target population is going to see any given Facebook advertisement. Whether it be a Sponsored Story in a user’s news feed or a more traditional ad on the side of the page, they are all competing with each other for attention at all times.

Is Facebook the best place to advertise? The worst? Somewhere in between? What do you think are the advantages and disadvantages to a paid Facebook campaign? Let us know in the comments.

Are people seeing the ads? Are they getting lost amidst the busy Facebook homepage? Do users even notice them anymore? Are Sponsored Stories more effective that traditional ads? All of these questions are simply part of a larger question that marketers have been asking themselves recently.

Is advertising on Facebook worth it?

General Motors makes a move

Although it’s an advertiser’s job to ask the “is it worth it?” question regarding any medium that they consider throwing cash into, the spotlight seemed to turn directly on Facebook after a very public breakup between the social network and a giant American automaker.

Back in May (right before the IPO), General Motors yanked all of their paid advertising from Facebook. According to the reports, GM was unconvinced of the effectiveness of advertising on the site. GM’s Marketing Chief Joel Ewanick said that the company was “definitely reassessing our advertising on Facebook, although the content is effective and important.”

Short and sweet version: Facebook ads don’t really work, but we gotta maintain a brand page.

This decision resonated among the social media/advertising community (and in the halls at Menlo Park, I assume). A few days later, the blow of this giant pullout was lessened a bit when we learned that GM was also planning on ditching its Super Bowl ad campaign in 2013. Maybe the Facebook exodus wasn’t personal after all – maybe it was simply part of a bigger strategy. We have to concede, however, that the timing of it all, days before the IPO, reeks just a bit.

Earlier this month, we heard that GM may be returning to the Facebook ad game, as executives at both companies have had talks. Even so, GM dropping its Facebook ad strategy just days before the IPO solidified the uneasiness and trepidation surrounding the culture of Facebook advertising.

Advertiser confidence on shaky ground

The folks over at GM aren’t the only advertisers that have doubted the efficacy of Facebook ads. Some recent reports from brand marketers and agency executives have painted a less-than-rosy picture concerning confidence that Facebook is a worthwhile platform to spend a good chunk of ad dollars.

33across’ Advertiser and Agency Study looked at over 2000 of these professionals and came up with a pretty interesting stat: 71% said that they were focusing 80% of their attention on other advertising mediums not named Facebook. Just four months ago, only 58% of ad men were mostly staying away from Facebook.

Not only that, but only 7% said that they were putting the majority of their ad dollars into Facebook. A whopping 0% said that 80% of their efforts come in the form of Facebook ads. Back in March, that number was small, but present at 4%.

In all, post-IPO, more than five times the number of respondents said that they were planning on decreasing their Facebook ad spending.

Another study of marketer/agency exec attitudes came to this conclusion: Facebook is vital, but Facebook ads may not be.

You see, although 86% said that Facebook is currently a part of their paid advertising strategy, 88% said that they would consider forgoing all of the paid stuff and just sticking with “implementing Facebook content.” If you’ve heard that before, just look a few lines up a what GM said. Basically, they’re both saying that having a presence on Facebook is important, but they can own, operate, and promote content through their brand pages for free.

The same group of people was asked their opinion of how useful Facebook is a “driving purchase intent.” Only 12.2% said that it is “very useful.” 19% said they didn’t know. 13.4% said it’s not useful at all and 55.5% said that it’s “somewhat” useful. What’s our takeaway here?

One word. “Meh.”

Facebook’s post-IPO ad blitz

Right before the IPO, marketing software provider WordStream released a report card comparing Facebook and Google in the ad game. Long story short, Google won. In their mind, Facebook failed at their ad targeting options and ad formats.

“So far, Facebook’s advertising platform hasn’t kept pace with the explosive growth of its social network, and it remains to be seen if CEO Mark Zuckerberg even wants to focus on advertising as a source of revenue,” said WordStream’s Larry Kim. “In his 2,500+ word letter to shareholders…he mentioned advertising just once.”

Of course, Zuck and the team has to focus on advertising. Since going public, monetization is probably the only thing that’s been on his mind.

That’s because it’s the main concern of anyone looking to the future of the company. And monetization in general isn’t the real concern – it’s actually mobile monetization that has been a hot topic surrounding Facebook both before and after the IPO.

“We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven… and if we are unable to successfully implement monetization strategies for our mobile users, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected”

Those words came straight from Facebook in their IPO filings. Zuckerberg himself has since echoed those claims. And in an effort to “generate meaningful revenue,” Facebook is in the process of making quite a few changes to their advertising options – which is good news for advertisers.

In one of the most important tweaks to their ad platform, Facebook now allows advertisers to purchase mobile-only Sponsored Stories. Before, you couldn’t choose exactly where the Sponsored Story you paid for would show up. But now, mobile-only targeting is one of five different ad options that Facebook offers.

We also know that a new ad platform, Facebook Exchange, is on the way. It’s basically a real-time ad bidding service that allows advertisers to target Facebook users based on previous activities. Here’s how I explained it before:

The premise of Facebook Exchange is pretty simple: When you visit a site (other than Facebook) and spend some time looking at a product, but don’t make the final purchase – that third-party site will be able to follow you to Facebook and target you there with a highly specialized ad.

For example, let’s say that I spent a good while checking out a new watch on a third-party retailer’s site (that has enlisted a demand-side platform) – let’s go with Swatch. Although I didn’t actually end up buying the watch, I was on the site long enough for them to determine that I was very interested in it – so they hit me with a cookie.

If the advertiser (in this case Swatch) wanted to pursue me beyond the walls of its site, the demand-side platform would contact Facebook and use an anonymous User ID to show intent to target me. Now, the next time I log in the Facebook, that cookie alerts everyone to my presence and the advertiser is allowed to make a real-time bid to show a pre-rendered ad to me.

And if everything goes according to plan, I’ll see a perfectly targeted ad for that blue Swatch watch I was eyeing earlier that day – or even earlier that week.

We’ve also heard reports that Facebook will soon be targeting mobile ads based on app usage. This means that if you play a lot of Zynga’s game Word with Friends, you may see an ad for another Zynga game like Scramble with Friends. As a user, you wouldn’t even have to have “liked” Zynga to see this ad. That’s because Facebook knows you’re playing Words with Friends because it forces you to log in through Facebook connect.

And it’s not only mobile ads that have been seeing some changes (or proposed changes). Recently, Facebook has been experimenting with showing more traditional right-side ads on pages as well as switching out the ads when users linger on a page.

Of course, all the ads, ads, ads could be having a negative effect on user engagement. In the latest American Customer Satisfaction Index, Facebook did just drop nearly 8% since 2011.

Some good signs for Facebook ads

If advertisers are going to retain/regain faith in Facebook ads, they probably need to see results. A recent report from TBG Digital suggests that Facebook ads are engaging – much more so than a competing service like Twitter.

TBG’s report looked at click-through rates of Facebook ads – both mobile and desktop – and compared them to Twitter ads in the user feed. They found that Facebook ads on desktop has a CTR of .588%, and mobile ads nearly doubled that at a rate of 1.14%. By comparison, Twitter ads had a CTR of .266%. That means, on average Facebook ads (mobile and desktop) are around three times as effective as Twitter ads.

Facebook’s higher CTR was attributed to the effectiveness of Sponsored Stories in the news feed, which feel more organic and less like a traditional ads. TBG also found that right-side traditional ads are becoming more and more ignored.

Data from a few Facebook Ads API partners echoes the good news about Facebook ads – when it comes to mobile. One parter found that Facebook mobile ads had a CTR that quadrupled the combined CTR of all other types of ad placements. Another source went even higher, reporting a 25x efficacy for mobile ads over other traditional ads.

A small legal problem going forward

Now that we’ve seen just how effective mobile ads in the form of Sponsored Stories can be, it’s time to tell you that Facebook is soon going to have to let you opt out of being featured as a Sponsored Story.

This comes as a result of a lawsuit filed by five plaintiffs in California. They claimed that Facebook had violated the law by using their likeness in advertisements (Sponsored Stories) without their consent, compensation, or the ability to opt out.

Facebook settled the suit with a $10 million cy-pres payment, which will go to charity. But they also agreed to amend their Statement of Rights and Responsibilities and implement an opt-out mechanism for Sponsored Stories. The opt-out mechanism will allow for user to exempt any past activities from begin featured as Sponsored Stories, although it won’t prevent them from seeing Sponsored Stories in their own news feeds.

From the settlement:

Facebook will create an easily accessible mechanism that enables users to view the subset of their interactions and other content that have been displayed in Sponsored Stories. Facebook will further engineer settings to enable users, upon viewing the interactions and other content that have been used in Sponsored Stories, to control which of these interactions and other content are edible to appear in additional Sponsored Stories.

This may not be a killer, but it definitely impacts Facebook’s ability to get advertisers enthusiastic about ads, as well as advertisers confidence in the ads’ efficacy.

Facebook is making plenty of moves to boost ad revenues by making it more attractive to brands. Do you think that Facebook advertising is worth it? If you’ve participated in an ad campaign on the site, what were the results? If you’re a Facebook user, what kind of marketing are you most likely to interact with? Let us know in the comments.