50% of Facebook Inc (FB)’s Growth Fueled by Higher Prices for Advertising on Platform — Is it a problem?

Facebook Inc (NASDAQ:FB) is making moves that could end up hurting it in the long-term. The company is squeezing more money from advertisers at a time when conversion rates on the platform appear to be declining. While nearly 50% of the company’s growth is fueled by marketers paying more for advertising on the platform, Morgan Hermand-Waiche, of Adore Me, says there is no justification for the lofty cost of advertising on Facebook. In fact, Hermand-Waiche claims that Facebook seems to be betting on its advertisers remaining blind to some uneasy truths.

Facebook Inc (NASDAQ:FB)’s thirst for rapid growth is driving the company to abandon the qualities that made it the platform of choice for startups. Today, advertising on the platform has not only become pretty expensive for startups, but conversion rates have also dropped. That means that advertisers are paying more for no actual improvement in value.

Facebook takeover

According to Hermand-Waiche, Facebook Inc (NASDAQ:FB) started making the wrong moves when it welcomed large corporations, who dumped their unspent advertising dollars on the platform, leading to an unreasonable hike in Facebook advertising costs.

The large companies that have now taken over Facebook were enticed to join the platform as they witnessed the rapid growth of startups advertising on the platform. However, as Facebook seems to favor large corporations while alienating startups, the company could end up losing the startups, along with the large corporations, in the long run. The reason is that the larger advertisers have shown a tendency to follow the advertising strategy of the lean and more agile startup rivals. That means that if the startups dump Facebook for rival platforms, the larger corporations would follow them.

Qualities that sold Facebook to advertisers

Startups such as Adore Me, an e-commerce lingerie company, credit their rapid growth to Facebook. Hermand-Waiche said that Facebook wooed startup advertisers with qualities such as accurate measurement of advertising results and better ad targeting solutions. While these are still outstanding qualities of Facebook, the high cost of advertising on the platform is pushing startups away.

In the one year period between the fourth quarter 2013 and fourth quarter of 2014, Facebook Inc (NASDAQ:FB)’s revenue rose by a whopping 54% and its revenue per advertiser also increased 24% in the period. That growth is an indication that Facebook is generating more advertising dollars because marketers are paying more.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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