Facebook Ad Prices Are Rising Amid Organic Reach Squeeze

10 percent higher pricing in first quarter

It turns out that, far from fleeing Facebook, brands are willing to pay more to advertise on the social network after their pages started reaching fewer fans with unpaid posts. Indeed, Facebook ad prices have increased following the recent outcry over diminished “organic reach,” according to industry analysts and marketing experts.

“We’re seeing pricing from Q4 [2013] to Q1 up 10 percent across the board,” said Dan Slagen, svp of marketing at Nanigans, a Facebook partner that helps companies execute social ad strategies. Slagen held a call with investors Tuesday hosted by analyst Robert Peck of SunTrust Robinson Humphrey.

Facebook sales had been tracking poorly at the start of Q1, but Peck said that ad revenue could end up flat compared to Q4, which would be a triumph of sorts—maintaining sales from the super-charged holidays. Increased ad prices and level spending indicate there were fewer but higher value impressions, Peck said.

Ad prices were trending up, in part because Facebook has not increased the frequency of ads. Facebook said in Q3 that it would keep ad inventory level at about 5 percent of all posts in the News Feed, the most coveted space for advertisers.

News Feed also is where brands saw lower organic exposure as Facebook prioritized personal news in users’ streams like weddings and births over click-inducing viral content or unpaid messages from big-name sponsors.

There has been a steady drop in how far posts from brand pages circulate without a paid strategy. Brands have seen their posts reach less than 5 percent of fans, and in some cases approaching 0 percent, when they used to see 25 percent reach or more.

Facebook says the diminished exposure is simply a reality of ever increasing content competition. That’s small comfort for companies that invested heavily in promoting Facebook pages, accruing Likes and fans with hopes of communicating freely with those audiences.

In December, when Facebook acknowledged that brands would connect with less of an audience on unpaid posts, many reconsidered their strategies on the platform, Peck said.

“They were not leaving Facebook. Some were disgruntled, but more were just trying to read through the data and see what sort of reach they were losing organically and see if they want to therefore spend to offset that,” Peck said.

However, these stalled ad budgets accelerated toward the end of Q1 when marketers realized they need Facebook-level returns to meet goals, Peck said.

“What could have been an ‘organic’ hindrance to the quarter now looks beneficial to the quarter,” Peck said. The four times return on investment completely justified more spending for advertisers, he added.

“As advertisers get into the latter half of Q1, if they’re behind the ball not meeting metrics, then it's time to shift spend and focus on what’s working,” Slagen said.

Nanigans, which can project the strength of Facebook sales based on its clients’ spending habits, said advertising revenue looks to be flat compared to last quarter, when Facebook ads generated $2.3 billion.

Facebook said it doesn’t comment on ad pricing outside of quarterly reports, the next of which is set for later this month.

Realizing the need to pay to play, more advertisers are likely driving up prices in Facebook auctions to buy targeted audiences, according to industry watchers.

Anna O'Brien, head of strategy at social data firm Sprinklr, said marketers will get creative to reach their desired audiences and that could increase prices on what she called “relational terms.”

Auctions for obviously in-demand audiences already were competitive, but now advertisers need to get more creative bidding on less expensive terms that reach the same desired set, O'Brien said. "It could drive up the price of terms that maybe weren't as expensive previously—relational terms," she said.

Adobe said it also has seen ad rates rising on Facebook, but said better targeting leading to higher click-through rates is the cause—not diminished organic reach. Adobe said the cost-per-click for social media is "still far below other vehicles like search."

"Social media is still a bargain in every sense for brand marketers so increases in ad rates will come from new dollars flowing in,” said Tamara Gaffney, principal analyst at Adobe Digital Index.