Facebook's Small Business Advantage

Facebook's focus on small businesses means its mobile-ad prices have room to climb compared to Twitter's.

Jan 13, 2014 at 12:45PM

Twitter (NYSE:TWTR) advertising might not be as lucrative for businesses as the company wants you to believe. Research from Cowen & Co. found that Twitter typically offers lower return on investment for its advertising partners compared to Facebook (NASDAQ:FB) and LinkedIn.

The biggest reason for the negative response toward Twitter was ad pricing -- "high minimum spend" and "cost of campaigns." Further research found that a Twitter campaign's cost-per-click, or CPC, was four times higher than that of a simultaneous Facebook ad campaign.

This is telling of Facebook's advantage with small businesses -- a focus of the company. It also implies that Twitter's ad prices may fall to equilibrium with Facebook's as the company faces pressure on its ad-pricing similar to Google (NASDAQ:GOOGL).

20 million potential advertisers
On Facebook's third-quarter conference call, COO Sheryl Sandberg mentioned that more than 20 million small and local businesses have pages on Facebook. One million of them are advertising on the platform.

These are customers that have limited budgets and are searching for the biggest bang for their buck. Facebook is facilitating that through a focus on marketer objectives. Basically Facebook asks advertisers what they want out of their campaign, then helps them achieve that goal through its analytics and advertising option. This focus is immensely useful to a small business that doesn't have time or money to spend on analytics and multiple campaigns.

Twitter, meanwhile, is still very useful to large companies with big budgets and strong followings on Twitter. Because Twitter asks its advertisers to tweet a message before it becomes an ad -- to maintain a pleasant user experience -- big companies are given instant insight into how their "ad" performs based on user response to its tweets. So far, however, Twitter's ad products lag behind Facebook's.

The mobile problem
It's no secret; mobile advertising is less effective than ads on PCs.

Twitter sees 76% of its users on tablets and smartphones, and generates more than 70% of its advertising revenue through mobile devices.Similarly, 74% of Facebook users access the site on smartphones and tablets, but the company generated just 49% of advertising revenue from mobile.

Here's where they really deviate: Facebook has seen its average mobile-ad price climb over the last year, while Twitter has faced pressure on its pricing with cost per engagement falling mightily over the past year.

This is not a problem unique to Twitter, though. Google has faced declining ad prices as more people use its smartphone and tablet apps. In the third quarter of last year, Google's average ad price declined 8%. The price decline is accelerating though, after declines of 4% and 6% in the first quarter and second quarter, respectively. The company is, however, making up for the decline in volume; clicks increased 26% in the third quarter.

Likewise, Twitter's growth in ad engagement has offset the decline in cost per ad, but there's no reason the price decline won't continue as long as Facebook is offering better conversions for a lower price. I believe Facebook's mobile-ad prices will continue to climb as Twitter's fall, and they will soon reach equilibrium in terms of ROI.

Currently, it seems Facebook offers more tools, such as app install ads, to small businesses to boost engagement and conversions. That would imply that Facebook's average ad price could climb higher than Twitter's, but Twitter seems to hold an advantage with the big businesses that buy the most advertising.

Small businesses use more online advertising
Small businesses are increasingly moving away from traditional offline advertising like print as they find advantages in the cost structure and flexibility of online advertising. Facebook is at the forefront of this movement, as it's begun catering directly to its 20 million small and local businesses with pages on the platform. As a result, it's one of the few companies that has been able to increase both its ad prices and engagement level.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Twitter. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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