Facebook (Nasdaq: FB) will start charging businesses to run promotional offers – generating cash to please investors and analysts looking for new revenue sources.
It’s the right move according to Wedbush Securities’ Michael Pachter.
“I think that if you kind of sum up the success of Living Social, Groupon, you can see the potential for Facebook to really generate quite a bit of revenue,” he said. “We forecast in our initiating coverage report that they were going to generate about $3 billion to $4 billion annually in revenue from targeted ads and this is the type of ad targeting we are talking about.”
Offers allow merchants to send deals to their Facebook fans, who can not only claim deals, but also post them for their friends to see. This creates a relationship between them that is quite different from daily deals sites like Groupon (Nasdaq: GRPN) and Living Social, which send out emails.
It’s been free, but now Facebook will require merchants to pay at least $5 on related ads to promote it.
Not only does this bring in new money – it’s a service that has mobile appeal.
“When we think about this very specific advertising unit being an offer it’s not going to matter whether it is mobile or whether it is desktop,” says Morningstar’s Rick Summer. “Arguably, people would actually redeem more over mobile but the point is that we have a very specific advertising product that can actually generate money.”
Investors and analysts have been wondering when Facebook would come up with new ways to make money. Its stock is down about 40% since it went public.
It also needs to compete with internet ad giants like Google (Nasdaq: GOOG) by capitalizing on what it does best.
“It needs to highlight the value of their social graph, really have more expensive ad units, meaning you have to be able to access that Facebook social graph, pay to get to the Facebook users. If you are going to pay more for that clearly you are getting more value from that. That’s a way of differentiating the Facebook advertising inventory versus the rest of the competition.”
Facebook hasn’t released any numbers on how many offers have run or been redeemed. But analysts say if it’s raising the stakes, it’s a safe bet the program has been going well.