Facebook reveals it actively increased ad prices in Q4 2011

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By Brendan Irvine-Broque Comment

In its S-1 filing earlier today, Facebook revealed that it took steps to increase the reserve price in its advertising auction system, which increased the minimum bid for some advertisers.

[…] in the fourth quarter of 2011, we increased the reserve price (i.e., the minimum price threshold) in our advertising auction system in order to reduce the frequency with which low quality ads are displayed to users. This change caused a reduction in the overall number of ads shown and increased the average price per ad as a result of factors including the removal of ads with bids that were below the reserve price and some advertisers raising their bids in response to this change.

Gradual increases to the reserve price could be the primary means by which Facebook increases revenue as demand for Facebook ads grows in upcoming years. When the reserve price increases, advertisers with the lowest bids are priced out of their ads being displayed and react by increasing their bids. This subsequently pushes the competition to raise bids. In effect, bid prices cascade upwards as advertisers with the lowest bids force higher bids from advertisers above them.