• by Mark Walsh  @markfwal, April 16, 2012

Click-through rates on Facebook are going down even as the cost of advertising on the dominant social network continues to rise. Average CPM rates for non-premium display ads on Facebook in the first quarter are up 41% from a year ago, and up 15% from the fourth quarter of 2011. At the same time, click-through rates dropped 8% from the prior quarter.

The new findings from social media marketing firm TBG Digital are based on an analysis of 268 billion Marketplace ad impressions served on Facebook across five major markets: the U.S., U.K., France, Germany and Canada. (The firm did not disclose the actual value of ad rates.) Cost-per-click rates on Facebook rose even faster than CPMs, increasing 25% over the last quarter.

Underscoring that point, WPP CEO Martin Sorrell recently projected that client spending on Facebook advertising would double to about $400 million this year.

A separate forecast by Brian Wieser of Pivotal Research Group released last week takes a more measured view, estimating that Facebook’s ad revenue will increase about 30% overall in 2012 from $3.1 billion last year. 

Still, how does TBG explain ad rates continuing to climb on Facebook while click rates slip? According to Simon Mansell, TBG Digital CEO, a likely factor driving down click-throughs was to increase the number of ads that could appear on most pages from six to seven.

The expansion of ad inventory has predictably pushed down click-through rates, since users generally do not click on more than one ad per page. “The supply has increased, and all things being equal, rates should have gone down. But due to significant demand, across the board, rates are still rising,” said Mansell.

One ad category for which clicks have not been falling is news. Mansell said new social news readers promoted by publishers including The Washington Post, Yahoo News and The Guardian on Facebook have pushed up click rates for news-related ads by nearly 200% during the quarter. News moved up to the fifth place among the 15 ad categories ranked by TBG Digital according to click-through rate.

Leading the way were entertainment, beauty and fitness, home and garden and health. At the bottom was finance, which had a click rate three times lower than entertainment. “This could be due to the finance sector sending 91% of its traffic out of the Facebook environment to sign up for their services, compared to the average of 38%,” stated the report.  

The retail sector accounted for the largest chunk of impressions in the first quarter -- at 23%, up 10 percentage points from the prior quarter. While a softening of retail advertising might be expected in the post-holiday period, the study suggested that retailers are starting to use Facebook more as a promotional tool for new products and seasonal offerings.

Rounding out the top five ad categories on Facebook by impression were food and drink (19%), finance (14%), entertainment (11%) games (11%) and all others (22%).

When it comes to Facebook brand pages, the TBG data showed the cost to attract fans is also on the rise as a result of increasing ad rates. The average cost per fan was up 43% in Q1 from the fourth quarter, with the increase steepest in the U.K. -- at 77% -- followed by the U.S., at 37%.

 “The early adopters last year were buying fans, and now the mass market has hopped the chasm, and the masses of brands are buying 'likes’ and trying to build their audiences within Facebook, so that demand is pushing up pricing,” said Mansell.