Facebook says its social ad business has plenty of room to grow

Facebook CEO Mark Zuckerberg revealed Thursday that Sponsored Stories in News Feed generate about $1 million a day — half of which is coming from mobile placement — but COO Sheryl Sandberg said that these ads still make up only a small percentage of the site’s inventory.

Facebook’s revenue from advertising was $992 million in Q2, a 28 percent increase from the same quarter last year, and up 13.8 percent from Q1. However, the overall number of ads delivered in the U.S. this quarter decreased 2 percent year-over-year as a result of users moving to mobile, and the price per ad decreased in Europe due to poor economic conditions in the area. The company says it is focused on making its ads more effective, demonstrating positive ROI and reaching the long tail of local advertisers in order to build its business.

Zuckerberg talked about the company’s belief in “social ads,” such as Sponsored Stories, which have shown early promise. Still, Sandberg says fewer than half of Facebook’s ads are social and include some mention of a user’s friend being connected to the advertiser. The other half of the ads are traditional display ads with a headline, body copy and image. These are small and off to the side of the page, and they don’t perform very well. As Facebook makes more of its ads social and brings them in line with News Feed content, Sandberg says, they will have better clickthrough rates and be more valuable to advertisers.

A recent study by TBG Digital found that average clickthrough rate for traditional sidebar ads was less than 0.05 percent. Sponsored Stories in the sidebar have about 0.075 percent CTR, those in News Feed have 0.588 percent CTR and those on mobile have an average CTR of 1.14 percent.

Besides getting users to click their ads, advertisers want to know that these clicks are actually helping their business. Sandberg says Facebook is making progress measuring their ads’ ability to generate sales. The company has independent ROI data from more than 60 campaigns that show 70 percent of campaigns on Facebook result in ROI of 3x or better, and 49 percent of campaigns showed 5x returns. Executives didn’t mention it specifically on Thursday’s call, but the social network introduced a new form of post-click and post-impression conversion tracking this quarter. This is in early stages and limited to Ads API partners for now, but it could become a key way advertisers understand the impact of their Facebook campaigns. This information is critical if Facebook wants to pull more ad dollars away from TV and other digital properties.

The third area Sandberg talked about as being a future source of growth was local business advertising. Brand advertisers have big budgets, but small business is the long tail that can be very profitable over time. Facebook made strides in this direction with its launch of Promoted Posts. These are basically advertisements that can be created and launched with a few clicks directly from a business’ Timeline. Sandberg noted that Facebook has an advantage in that many small business owners are already familiar with the social network through their personal use. With business pages being so similar to personal profiles, it isn’t much of a leap for people to get involved in promoting their business on the site. As Facebook makes it easier for business owners to connect with customers and run ads that work, the company can capture new revenue.