During Facebook Inc.'s earnings call last month the social-networking company revealed the average per ad price increased 123% in the most recent quarter compared with a year ago. Ad impressions—the number of ads it displayed—declined 25%, while ad revenue rose 67% to $2.68 billion, the company said.
Facebook says it is providing better outcomes for its advertisers. "The price of ads correlates to the value that they create," Dave Wehner, Facebook's chief financial officer, said on the call. "We continue to focus on making those ad units better and better, more relevant and targeted for the people who use Facebook, as well as for marketers."
But some small-business owners don't necessarily see it that way. The price increase is "great news for Facebook's top line, but it buries the small-business owner who has a limited ad budget," says Nathan Latka, chief executive of Heyo.com, a Blacksburg, Va., firm that makes applications for creating marketing contests on Facebook.
While the value of Facebook ads may be improving for some, many small businesses are disadvantaged, he adds, because they don't have the financial or human resources to manage the work behind a successful social-media ad campaign, including designing ads, measuring their reach and making changes to improve their effectiveness.
In 2010, small businessman Tom Buroojy began buying ads that appear on the right side of Facebook users' news feeds for his Newtown, Pa., firm, iHeadBones Inc., a maker of earphones. Two years later, he was spending about $50 monthly on the ads. After trying various ad messages, he settled on "Hate Your Earbuds?" which delivered vastly more clicks than "Listen to Your Music Safely."
Small-business owner and onetime Facebook advertiser Tom Buroojy, demonstrates his iHeadBones headphones. Jeff Lautenberger for The Wall Street Journal
He targeted the ads toward users whose profiles indicated that they like running and hiking—an audience that's likely to be increasingly sought after by big sports brands as well makers of new wearable-tech devices. But by 2013, the "cost per click" on his ads more than quadrupled to about $2, according to his Facebook statements. The volume of ad impressions, clicks and sales from Facebook users had plummeted by 60%, 50% and 75%, respectively, he said.
Mr. Buroojy put a halt to his Facebook ads in September, but he says he's continuing to advertise on Google Inc., GOOGL +1.54% Google Inc. Cl A U.S.: Nasdaq $592.70 +8.99 +1.54% Aug. 18, 2014 4:00 pm Volume (Delayed 15m) : 1.47M AFTER HOURS $593.70 +1.00 +0.17% Aug. 18, 2014 7:41 pm Volume (Delayed 15m) : 3,580 P/E Ratio 30.11 Market Cap $397.33 Billion Dividend Yield Rev. per Employee $1,321,030 08/18/14 Getting More Than Just Words i... 08/18/14 As Google Builds Out Own Conte... 08/18/14 Google Is Planning to Offer Ac... More quote details and news » GOOGL Your Value Your Change Short position spending about $325 a month. "We are seeing way more sales from people who came from Google," Mr. Buroojy says.
One reason some businesses' Facebook ads are reaching fewer users and costing more is that competition for ad space has intensified. Roughly 1.5 million firms of all sizes pay to advertise on Facebook today, up from around one million a year ago. Also, there's less space available. Ads in Facebook's right-hand column recently took on a new, larger design, allowing room for fewer per page.
When it announced the change in April, Facebook said overall "people will see fewer ads on Facebook" and that "some advertisers may see increased prices at auction."
The Facebook spokeswoman said the new format, plus a growing array of free targeting and measurement tools, are designed to improve ad effectiveness and value.
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"Small businesses that effectively use the many targeting and measurement options we offer are seeing healthy returns on Facebook ads," she said.
Lauren Pohl, founder of KidzCentralStation.com, began paying Facebook 11 months ago to advertise her online platform for parents to find and book children's classes, initially setting a $10 daily limit.
She says she has worked hard to make her ads more compelling by first testing them free of charge in her New York company's news feed. For example, she has run ads with slightly different images (a drawing of three kids, versus a photo of just one) and marketing language ("NYC top class providers" versus "classes for kids in NYC").
After seeing which generated the most "likes"—such as the photo of the one child with the words, "NYC top class providers"—she would pay for just the better-performing ad to appear inside and to the right of users' news feeds.
The most useful Facebook tool for her so far has been the built-in menu options for targeting users based on their age and location, gender, if they have children, and the ages of their children. She gets better results focusing on parents of children ages 12 and under in two New York City boroughs, instead of moms throughout New York City with children any age.
Ms. Pohl says her ads' impressions and clicks have since declined 55% and 73%, respectively, though her sales have risen 129%.
Her hunch is that the ads gave KidzCentralStation.com greater exposure because "even if someone doesn't click on an ad they may see it and that helps build brand awareness," she says.
She also advertises through Google and email marketing campaigns. Facebook currently accounts for just half of her total ad budget—though in the fall, she plans to increase her daily spend on Facebook to $50.
In an April survey of 728 small-business owners, 83% said they expect to spend nothing this year on Facebook ads. But 14% said they expect to spend between $1 and $4,999 this year and 1.3% said between $5,000 and $9,999.
Of those who previously paid for Facebook ads, just 19% said they've seen a quantifiable increase in sales, revenue or brand awareness, according to the survey, by The Wall Street Journal and Vistage International. Fifty-five percent didn't, and 26% were unsure.
Facebook sells ads on an auction basis, whereby advertisers bid against one another to have their ads displayed to users. The price of ads varies based on a range of factors, including advertiser demand, ad-targeting parameters, and how well Facebook's technology figures specific ad content will resonate with its users.
Don DiCostanzo, co-owner of electric-bicycle manufacturer Pedego Inc., began advertising on Facebook in 2012. But then a three-and-a-half day campaign in May failed to generate even one sale.
He spent about $3,400 on two right-hand column ads over the Memorial Day weekend. One targeted men, the other women, ages 40 and older in Southern California, where Pedego's bikes are sold through 12 dealerships for between $2,095 and $3,695 apiece. The ads offered paying customers $200 worth of free accessories such as baskets, lights, fenders and saddlebags.
Mr. DiCostanzo says they generated 354,000 impressions and 7,831 clicks and that the clicks cost him 40 cents apiece, up from 24 cents when he ran a similar campaign in December.
Unlike with the winter campaign, this time he asked his dealers to find out what led customers to buy from them, and "not one person told the dealers that he or she came in as a result of the Facebook ad," he says.
With help from some of his 17 employees, he's still posting about three updates daily, some with video and photos, to his Irvine, Calif., company's Facebook page. He's using it to engage with users in hopes of boosting sales for free.
"The value of using Facebook as a marketing tool has dramatically diminished as its popularity has grown," he says.
Write to Sarah E. Needleman at email@example.com and Jack Marshall at Jack.Marshall@wsj.com