If you're a frequent online shopper, get ready to see a few more interesting ads in your Facebook (NASDAQ:FB) News Feed. Last week Facebook started experimenting with Product Ads, which help businesses advertise a range of products across all devices and tailor the featured products to the viewer's activity and interests. The first retailers to test the new dynamic ad format are Target and Shutterfly.
These ads will compete for ad dollars with Google's (NASDAQ:GOOGL) (NASDAQ:GOOG) Shopping Ads (previously Product Listing Ads), which the company launched in 2013. Google has had quite a bit of success with its Shopping Ads, which show up when someone searches for the product, successfully moving retailers from text-based ads to the higher-priced graphic ads. Now, Facebook represents a serious threat to Google's growing business.
Retailers love Shopping Ads
Shopping Ads have quickly grown into an important revenue generator for Google. In the fourth quarter, 20% of paid clicks for retail-related searches were for Shopping Ads, according to Adobe's Digital Index. Adobe also found that spending on Shopping Ads increased 47% year over year.
Moreover, retailers spent 6% less on Google text ads as a result of declining cost per click and a shift to Shopping Ads. By the end of 2015, Adobe predicts Shopping Ads will account for 30% of all search ad dollars for Google.
Facebook sees no reason it can't copy Google's success. Retailers had already been piecing together their own product ads, but the makeshift versions retailers created had limited targeting capabilities. Facebook is lending retailers a hand by helping them create dynamic ads that can re-target advertisements across devices. The dynamic ads will show products based on users' browsing habits across the Web and mobile apps.
Facebook's targeting capabilities are superior to Google's, and the company is able to use technology from Atlas -- it's new demand-side ad platform -- to re-target ads across devices and gather data from mobile app and Web browsing. Google remains one step behind in that regard, but it's less about targeting than keyword-based advertising.
In effect, neither Google nor Facebook can claim a better product. For some companies Google's Shopping Ads will work better and for others Facebook's Product Ads will work better.
But in order to find out, retailers will have to try both. Therefore, ad budgets likely will slowly shift to Facebook from Google.
What about those buy buttons?
Both Google and Facebook have been experimenting with "buy" buttons to allow retailers to complete transactions without forcing users to leave the page. Buy buttons naturally complement Shopping and Product Ads, and represent an incremental revenue opportunity for both companies.
Facebook seems to be ahead of Google in that regard, experimenting with a small public rollout last summer. Google has yet to run any public experiments with a buy button.
If Facebook couples a buy button with its new Product Ads, it could boost conversions for retailers. That could cause more ad dollars to flow Facebook's way instead of to Google.
What does this all mean for Facebook investors?
Facebook has consistently lowered its ad supply as more users shift to mobile. The effect has been a rapid increase in average ad prices. If Facebook wants to continue that momentum it needs more premium ad products. Product Ads certainly fit the bill, as they offer superior targeting, re-targeting, and tracking to the makeshift versions retailers have been using.
Facebook can build on top of Product Ads still by adding the buy button, as mentioned, or offering retailers the ability to use video. Both of those would increase the price of an ad. With ad impressions falling 65% in the fourth quarter (due partly to actions taken by Facebook and due partly to things outside of its control), Facebook needs to continue increasing ad prices to grow revenue.
Adam Levy owns shares of Apple. The Motley Fool recommends Adobe Systems, Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). 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.