Despite the fact that it's a mature tech giant and not a scrappy little startup, Facebook revenues continue to grow at a blistering clip.

This not only suggests that Facebook has not only come a long way in figuring out its ad model but that advertisers are liking the results they're seeing.

But not all advertisers are happy, and one is suggesting that Facebook's ad boom is really a huge bubble.

In a guest post on TechCrunch, Morgan Hermand-Waiche, founder and CEO of online lingerie startup Adore Me, explains why he's trying to move eight figures of annual spend away from the world's largest social network.

According to Hermand-Waiche:

This year alone, our cost per click went up 180% from start to end of Q1, and the prices in the last days of March — a time of the year with no big-shopping-spree-inducing holidays — were similar to those of Valentine’s Day."

Hermand-Waiche attributes much of the surge to "big corporates" with "little to no knowledge of online advertising" investing more heavily in Facebook advertising.

"The first signal of corporate takeover was budget dumping. Like clockwork, at the end of each quarter, corporate behemoths would cast away their unused quarterly budgets on Facebook, artificially inflating prices," he explained, adding "To add insult to injury, as all corporates were bombarding consumers at the same time with no good reason, conversion rates were down. So, not only are advertisers paying more but they’re getting less — irrational spending at its best."

He also points to what advertisers are spending on:

Yes, Facebook users are clicking more, and advertisers are paying for more clicks. But what are users really clicking on?

Facebook calculates its CPCs as cost per every single click the user makes, whether it’s a Like, a share, or a visit to the brand’s website. But in the world of direct-response advertising, where “engagement” is an obscure term (whose impact on either sales or brand awareness no one knows how to measure), Likes and shares are worth absolutely nothing.

This is how the real surge of Facebook prices is disguised: For us, Facebook CPCs — cost per any Facebook click — went up 50 percent from January 2014 to January 2015. But our real CPC value — cost per Facebook click to our website — went up by a whopping 127 percent in the same time period. That means that our real Facebook prices have more than doubled YoY, and a sizable chunk of that price increase is due to a service of Likes and shares valued at zero.

Hermand-Waiche claims that new and corporate advertisers on Facebook "are unaware that a hefty share of their Facebook spend is attributed to Likes and shares" and suggests that many mass-market brands are paying a premium for targeting features they don't really need, further inflating prices.

Hermand-Waiche's conclusion: "Facebook is exhibiting all the alarming symptoms of a bubble: a service traded in high volumes at inflated and economically irrational prices."

But is he right? 

There is no doubt that some advertisers are more sophisticated than others, and some that can afford to run inefficient, less-than-productive Facebook campaigns will do so.

But inefficient players exist in all advertising channels, online and offline, and the notion that big corporations represent dumb money, ruining a good thing for upstarts like Adore Me, however appealing, is probably too simple to be accurate. Plenty of big companies are far more experienced and savvy than Hermand-Waiche would apparently like to believe.

The reality is that advertisers have different goals, and different tolerances for cost based on the markets they target and the financial profiles of their businesses.

Ironically, Hermand-Waiche demonstrates that by describing how his company has moved more of its ad dollars to television in response to Facebook's rising costs.

The result? "The CPAs on TV weren’t that far off from Facebook," he says. In other words, television was still roughly as costly a channel as Facebook.

Hermand-Waiche spins this fact by suggesting that his company's television results were achieved with third-party agency fees, unoptimized spending and expensive video creatives, but realistically, there's only so much fat that can be cut out from television campaigns and most campaigns come with significant risk because of their up-front costs.

None of this means that advertisers shouldn't constantly reevaluate how they allocate their ad spend as channels evolve. Perhaps television is a better channel for Adore Me.

But advertisers also need to accept that the global ad markets are relatively efficient and evolve over time. For early adopters of new channels, that means great channel bargains typically don't remain great bargains for long. As channels become more prominent and proven, costs almost always rise.

Patricio Robles

Published 20 April, 2015 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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Comments (4)

Jeff Rajeck

Jeff Rajeck, Marketing Director at Recruit Socially

Agree. Facebook provides advertisers with a service they've never had before - personalized targeting of the highest order, cross-device allocation, and more analytics then you can shake a stick at.

With such an amazing service, we can't bellyache about the absolute CPM. Instead we have to set business goals and measure attribution as much as possible to the platform.

Then, as you say, I suspect we will find that these 'inflated' prices are merely the result of the ad market acting efficiently. Increasing demand for a product with limited inventory will always raise its price.

about 3 years ago

Guy Hatton

Guy Hatton, Director at Clinic

Brands have a fear of getting left behind.
They are trying everything they can to be first movers and are doing this with imperfect understanding, but with large budgets.
Facebook are in the fortunate position to hold the monopoly on targeted social media advertising. And will soak up the cash in the bubble as long as it gets thrown at them.

about 3 years ago

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Peter Cunningham, Product & Marketing at Buyapowa

The same thing happened with Google PPC - I remember reading a quote a few years ago in 'Search engine advertising' by Kevin Lee and Catherine Seda which went along the lines that you can't assume that the person bidding against you is sane, has any strategy or means of tracking what they are spending. Basically following competitors by just bidding more can lead to ruin. Even just the increased number of 'sane' advertisers will increase competition for the clicks and their costs due to 101 Economics 'supply and demand'.

Google worked out a smart way to sell CPM via CPC by penalising ads that don't get clicked. I assume Facebook is doing the same.

When you see your CPCs inexorably rise there is always the lingering suspicion that, given that these players own the whole ecosystem and have all the data, they could be 'influencing' the trend towards higher CPCs. Without offering any opinion here, lets say that it is safe to say that they are not doing anything to stem the rise of CPCs.

The basic point here is that when faced with increased CPCs, the best way round this is to stop thinking of Facebook like an ad network where you can buy inventory and buy more clicks. You should be thinking how you can work with the key elements of social to make offers designed for social that get your fans and followers to share with their friends and family. That is the best way out the cycle of paying more and more for each click and paying for each click.

At Buyapowa, we have found that the combination of concepts like tiered rewards, gamification and mutual targets can incentivise your customers and fans to share your offers. This is the best antidote to spending ever more on CPCs.

about 3 years ago

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Depesh Mandalia, CEO & Founder at SM Commerce

Agree with Peter. Would also add, having seen Facebook ads work extremely well that to drive profitable growth, that as with all upcoming channels, there will be the minority to understand this and create profit, and the majority that are suckered into thinking there's easy money to make, flushing their ad spend into Facebook's end of year bonus kitty. Fact is as with an ad channel, the provider want to maintain high advertiser spend AND create ongoing value to maintain a symbiotic relationship. Facebook will soon get to the stage of Google Adwords by levelling out all players but until then, those with early mover advantage will see profits decline and knowledge across the wider base of advertisers increase.

about 3 years ago

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