Source: Google.
For every ad from Google (GOOG -0.21%) (GOOGL -0.30%) you've seen, there's probably another one you that showed up on your screen that you didn't see, according to a report from the company itself. Meanwhile, many Internet browsers call into question the efficacy of advertising on Google and Facebook (META -0.09%) in general.
Indeed, Google's admission that 56% of ad impressions go unseen isn't inspiring for businesses thinking of advertising using its platform. Neither is Facebook's rapidly increasing average ad price.
The average investor might look at those trends and think it's just a matter of time before the advertising money stops flowing into these ad-supported platforms. But those worries may be misplaced.
How Google and Facebook determine ad prices
Ad prices on Google and Facebook are determined by the market for ads targeted by keyword, demographic, or whatever other data available to advertisers. There's no set price for businesses, so they can offer as much or as little for advertising as they want. (Although if they offer too little, they probably won't get displayed because of competing offers.)
The auction mechanism means that ad prices are generally priced at a fair value based on their effectiveness. That's why we've seen a decline in Google's average ad price, as it displays more ads on mobile devices and in more developing economies. Conversions are generally harder on mobile and worth less in poorer economies.
Based on these factors alone, it should be obvious that Google and Facebook ads are worth it. Advertisers wouldn't continue to pay higher prices on Facebook if it wasn't worth it.
Luckily we have some data to back up this assumption
One study conducted by Nielsen found that consumer packaged-goods companies have actually been underestimating their return on investment for Google search ads by 39%. The gap for Facebook ads' ROI is even more dramatic, off by as much as 48%.
The IAB estimates that the average cost per conversion for digital display advertising is lower than all other media platforms, including television, radio, and print.
Another Nielsen study of CPG companies found the average business saw a return of $2.79 per $1 invested in online advertising.
Facebook marketing partner Kenshoo just released an analysis of advertising on Facebook for November. While average ad prices increased seven times, ROI still improved nearly 100% despite the much higher cost per thousand impressions.
And if that's not enough, Google and Facebook are offering tools to continue improving ROI
The reason Google knows what percentage of its advertisements are actually seen is because of technology its been rolling out this year called Active View, which measures when at least 50% of an ad is on the display for at least one second. If an advertiser wants, he can elect to only pay for impressions that a browser actually views using Active View technology. Of course, the flip side of that is that advertisers will have to bid more per impression.
Additionally, Google is providing marketers with better tools to measure the ROI of a campaign, such as CausalImpact. CausalImpact helps estimate what traffic to a website would have looked like without an Adwords campaign, so marketers can get a better sense of the true impact of their spending.
Facebook recently released its revamped version of Atlas, which helps marketers track campaigns across devices (desktop, mobile, television) and track conversions both online and in-store. Finding the true ROI of an ad campaign will lead to more efficient ad pricing, which based on the above studies appears to be higher than it is currently.
What does this all mean for investors?
For one, the sky isn't about to fall on Google or Facebook investors. If anything, these studies and the new tools provided by both companies mean that both companies should be able to continue increasing their ad revenues.
Through the first nine months of 2014, Google generated nearly $43 billion in advertising revenue -- 89.5% of total revenue. Facebook generated nearly $8 billion in ad revenue in the same period, accounting for 91.7% of total revenue.
As long as ROI for advertisers continues to increase, there's no reason (outside of an unlikely decline in page views) that Google and Facebook shouldn't be able to continue increasing their ad revenue.
