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.
Go straight to the charts >
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 percent, 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 favor 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.
