Is Facebook Advertising Too Cheap?

NEW YORK (MainStreet) -- What is great about Facebook for businesses may not be great for Facebook, the business.

Who wins and who loses with the high-flying Facebook IPO I will leave to greater minds. But for businesses, anyway, getting in touch with the value of this firm is no mystery. One simply needs to do like I did: Become a client.

Facebook makes its startlingly cheap advertising process idiot-proof: No complex formulas or search-term benchmarks -- a business must simply dream up who might "like" its product and decide how much to spend.

Over the past several months, my digital content company has started running a series of advertisements on the service -- you know, those small rectangular ads that run along the right side of many Facebook pages. My shop pays Mark Zuckerberg and company monthly fees to run these ads, and in return we get a report on impressions and click-through.

As we try to cobble together a return on our investment the effectiveness -- and future -- of Facebook as a business has become a red hot topic around here. Here's why.

1. Facebook's "like-based" advertising model definitely works.
One point is beyond debate: Facebook's "like-based" approach to marketing is a fabulous idea. Designing sophisticated advertising campaigns really is as simple as clicking on the "Advertising" link on the lower part of many Facebook pages; setting up an account and thinking of what sort of people might "like" our ad. Facebook makes this process idiot-proof. No complex formulas or search-term benchmarks -- simply dream up who might "like" your product. And since one can set up an account to pay only when people click through an ad, clear daily spend limits are easy to establish. We were able to ration our appetite for advertising risk and within a few weeks found it surprisingly simple to get a sophisticated, targeted marketing campaign going.

2. Advertising on Facebook is incredibly cheap.
The cost of advertising with this service is astonishingly small. For some campaigns, we would spend less than 50 cents (That's fifty cents!) per month to reach just a small group of people. Even for a more broad marketing campaign, for several thousand or so, we'd be well served with just a $70 a month bet. And at least in our testing, both these investments led to return. Our super-targeted ads, called "sniper" ads here in the shop, yielded us an excellent potential client. The broader campaigns sold a custom-made sports jersey that one of our employees' relatives tried to sell. At those prices, you cannot go wrong with Facebook advertising.

3. Facebook advertising is, frankly, too cheap.
As marvelous a tool as Facebook is for businesses, as a business this operation clearly struggles to charge meaningful fees. If a customer's low-end spend is less than a dollar per month and a healthy ad campaign is less than a hundred a month, the revenue potential for Facebook will be limited. After all, how much can Zuckerberg expect to make if my business can get away with spending just $6 a year with his? Maybe this is a market-grabbing tactic, but whiffs of this lack of pricing leverage are clear in the company's IPO disclosure. As of now, it has roughly 845 million users and about $4 billion in sales -- that's just $5 average revenue per user per year, or about in line with what I might spend.

Bottom line
Any business would be foolish not to consider Facebook as an ongoing marketing option. Its advertising model is innovative, practical and packs real ROI. But investors must realize that as powerful a marketing tool as Facebook might be, the market itself does not value this service. Say I spend $100 a year on Facebook -- that might be a fortune to this company, but that does make actually a fortune.

To this business owner, Facebook's long-term enterprise value has to be a question mark from the moment it goes public.

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