With all of the options available to advertisers on Facebook (NASDAQ:FB), figuring out which ad format to use can be awfully difficult. On top of that, marketers need to find the perfect ad copy, picture, or video to convert those ad dollars into the most sales. This situation can leave advertisers continually testing new ideas until they find what works best. And that process can take weeks.
Earlier this year, Facebook made it easy to determine how effective an advertisement was for a company by providing those companies with a tool called Conversion Lift. It simply divided an advertiser's target audience in half and showed an ad to one half while the other half acted as a control group. It used ad tech from its revamped ad tool to measure sales conversions for both audiences and showed marketers how well their ad campaign performed versus the control group.
This month, Facebook is making Conversion Lift significantly more powerful by allowing marketers to test multiple ad campaigns at the same time. It doesn't just include specific ad units, but combinations of ads (like a branding message and a direct-response campaign) to determine which ads work best. The new tool drastically speeds up the testing process for marketers and benefits both marketers and Facebook.
Show me the money
Helping advertisers determine their most effective ad campaign isn't some sort of altruistic endeavor from Facebook (although it does have a couple). The less testing an advertiser has to do, the more quickly it'll ramp up spending. Moreover, optimized campaigns produce better results, which means advertisers will be willing to pay more per ad. And with conversion statistics, they'll know approximately how much an ad is worth.
That's why Facebook isn't the only company trying to provide as much information as possible to advertisers. Earlier this year, Twitter (NYSE:TWTR) introduced audience insights, which gives advertisers more information about their existing audiences. Advertisers can use the information to target ad campaigns most effectively and produce better results.
But Twitter's tools and analytics aren't as robust as Facebook's. Twitter is still relying on marketers to do most of the work in determining its most effective audience, and it doesn't help determine how effective an ad is at all. As far as ease of use goes, Facebook is well ahead of Twitter, which makes it much more appealing.
As a result, Facebook stands to benefit not only from an increased average value per ad from optimizing campaigns, it could also attract more advertisers to its platform because it's easier to use. Both of these factors will lead to higher average ad prices.
Keeping ad prices moving higher
Facebook has seen its average price per ad engagement skyrocket in each of the past four quarters. The primary cause is the changes it made to right-hand column ads in the third quarter of last year, supplying fewer ads per page view and making them bigger and more noticeable. As a result, Facebook's average ad price increased 220% last quarter, while total ad impressions declined 55%.
While there are some organic factors playing into the increase in average ad price -- a shift to mobile; more active advertisers -- Facebook will certainly begin to see a drop-off in average ad price growth starting this quarter. The company is pushing different ad formats, such as video, that it believes will continue driving an increase in ad prices, but its new Conversion Lift tool will help advertisers determine exactly how much they're worth.
If Facebook is correct that a video ad is worth more than a static ad, its investment in the ad tech behind Conversion Lift will pay off, and investors should see continued growth in average ad prices. That's particularly important as user growth slows, especially in markets such as the U.S. and Canada, and attention shifts from desktop to mobile (where there are fewer ad impressions). Ad revenue growth will continue to be driven by increased ad prices as ad impressions grow much more slowly.