Facebook Inc said it will start charging businesses to run promotional offers on its social network, turning a free service into a potential revenue generator as investors and analysts demand new sources of growth from the recently listed company.
Facebook launched Facebook Offers earlier this year, allowing retailers and local merchants to send deals to their Facebook fans. Users claim the offers from their Facebook News Feeds and redeem the vouchers at stores to get discounts.
The service has been free, but in the coming weeks ,Facebook will require merchants to pay at least $5 on related ads to promote each Facebook Offer to a targeted audience of fans and friends of fans. The cost will vary based on the size of a merchant's Facebook page.
"They should be able to charge a fee for customer acquisition, whether it's an Offer or any other marketing tool," said Colin Sebastian, an analyst at R.W. Baird.
"The question will be whether Facebook is charging an appropriate amount to advertisers for the right to post an Offer, for instance, if the Offer generates a positive return," Sebastian added. "If it does, then we would expect Facebook to have some success with the Offers program."
Since Facebook went public in May, the company has been under pressure from Wall Street to show how it can turn its giant social network into a money machine. Facebook shares have lost about 40 percent of their value since the IPO.
The commerce potential of Facebook, known as f-commerce, has yet to materialise, partly because retailers have been able to feast on a host of free tools on the social network to attract customers.
Tying Facebook Offers to a paid ad service suggests the company is working to change this.
"We think this aligns incentives nicely," said Gokul Rajaram, director of product management for Facebook's advertising and Pages businesses. "The best results on Facebook Offers will come from organic distribution plus paid distribution."
In the past, some Facebook Offers have not been relevant to all users, partly because some people saw deals in their News Feeds from merchants located far away from where they live, Rajaram added. The News Feed is a list of updates from users' friends, companies and other organizations they have signed up to follow.
"The requirement to pay for related ads will focus merchants on who and where they want the offer to reach," he said.
Facebook is now expanding Offers to online-only businesses, he added. Before, the service was available only to merchants with physical locations.
Facebook is also adding barcodes for offers, so customers can redeem offers more easily. The barcodes work globally, Rajaram said.
The executive declined to disclose how many Facebook Offers have been run so far, how many merchants have taken part, or how many deals have been claimed and redeemed by consumers.
However, he said Facebook was "very happy" with the success of its Offers business.
"That's why we're expanding and investing more in it," Rajaram said.
An expanded, paid Facebook Offers service may mean more competition for daily-deal companies like Groupon Inc and LivingSocial, partly owned by Amazon.com Inc.
Facebook ended a brief entry into the daily deal business last year, but the company is tackling the local commerce opportunity with its Offers service.
"We don't see deals going away," said Gordon Borrell, CEO of Borrell Associates, a research firm that tracks local advertising.
"When you add Facebook to the equation it really magnifies it," he said. "People will like it, they will forward it, they will post it on their own page or somebody's page. That is an element that Groupon and LivingSocial are really missing."