As we reported last week, advertising on Facebook has increased 10-fold in the last year, with brands like Coca-Cola, Starbucks and Nike putting out focused social media ad campaigns which create real customer engagement and significant return on investment.

Even if you haven’t got the marketing budget of a global brand, with nearly half of all small businesses finding customers through social networks it’s important to realise that you can still run an effective Facebook advertising campaign without spending that much money. And if you haven’t picked up on this, your competitors certainly have! Worldwide ad spending on the network for 2010 looks set to hit $1.28 billion.

So why are businesses flocking to advertise through Facebook?

1. It’s precisely targeted

Facebook allows for very precise targeting of your ads so you can reach the people you know will be interested in your product. You can set filters according to location, language, demographic, education and work, likes and interests, keywords and connections.

So if you’re opening a new café for example you could target office workers or mums people living in the area who say they love coffee. Drag them away from their local Starbucks with incentives to get their caffeine fix at your place instead.

Phones 4u targeted 16 to 24-year-olds in a two-stage campaign. First they asked them to vote on their favourite musical legend. When Dizzee Rascal came out top they ran ads encouraging users to Like the Phone4U page for the chance to win tickets to see him in London. Of course this appeared in their friends’ news feeds, allowing easy spread of the campaign.

“The viral reach is very powerful and there aren’t many platforms out there that encourage this kind of earned media,” said Project Manager Neil Higton in this Facebook case study. “It offers engagement and conversation within your marketing that normal ads can’t match.“

2. You can reach consumers directly

B2C is the real success story of Facebook advertising. The introduction of the Like button means consumers allow product updates to flow seamlessly alongside their news updates from friends and family, allowing for uninterrupted and informal engagement with your brand. A coordinated campaign allows you to present ads which drive traffic to your official page where you can include information, forums, offers and all sorts of opportunities for user interaction.

As Murray Newlands from Influence People, who are putting on next month’s Social Media Advertising conference, explains, “With Google ads you are steering people from Google to your site, whereas Facebook, Twitter and other social media campaigns are about growing a presence, developing connections and interacting with consumers over a longer period of time.”

Coca-Cola is a great example of this, with ads that direct users to a page where their 10 million members can upload fun photos of themselves holding up the world’s most well-known soft drink. “This then leads to exponential growth of the campaign to users beyond the initial member’s seed by the adverts,” says Newlands. “While those people have not bought a drink then and there, for Coca-Cola it is about staying at the forefront of people’s minds.”

3. You can reach out to other businesses

Use Facebook ads for your B2B campaign to direct users to your company page, where you can talk with authority about your industry and offer product updates and incentives to buy.

“If you want to target university-educated CFOs over 40 living in Edinburgh people or people working in marketing for FTSE 500 companies you can target them on Facebook,” says Newlands. “That is an incredible amount of targeting and segmentation that is just not available through advertising in other mediums.”

4. Encourage brand recognition

Effective use of images can really make your ad campaign stand out, increase brand awareness and improve your click-through rate. It’s another area in which they have the edge over Google Adwords, which don’t allow images.

Another case study on the Facebook site shows how Visit Britain ran a campaign to draw people to their Love UK group. They went from 2,000 to 25,000 members in just four months after an eye-catching campaign featuring classic British icons such as beefeaters, castles, fish and chips and a heart-shaped Union Jack logo.

A bit of thought and creativity can really reap rewards.

5. Tweak, test and analyse

Ad not performing well? Try a different picture or include a stronger call to action in the headline. Switch the copy and the title around. Create several variations on one advert and compare their performance, then switch to the one which is bringing you the most traffic.

The Facebook Insights tool lets you monitor interaction, feeding you information on the demographics and interests of the people you’re targeting so you can tell if you’re reaching the right people. If the two don’t match, just go back to the ads and adjust them accordingly.

Such is the beauty of social media advertising compared to traditional print ads; you can tweak ‘em ‘til the cows come home.

6. Keep an eye on your budget

As Visit Britain’s Head of Digital and Social Media Justin Reid points out, “It doesn’t require a massive spend to do a post and we know within 10 minutes of doing one whether the post is resonating with people or not.”

It’s this flexibility and control over the budget which makes Facebook advertising very appealing to small businesses. You estimate a price for each ad, using their recommendations if need be, set a daily budget and the amount you are charged will never exceed this figure. A choice between CPC (pay per click) and CPM (pay for views) means you choose the most cost-effective option for your business or campaign.

You could start low while you get the hang of it, then increase your daily spend as you discover which ads are the most effective. The minimum cost per click is $0.01 USD and the minimum cost per thousand impressions is $0.02 USD.

7. Facebook is where the traffic is

Facebook now has 500 million active users around the world with half of these logging on every day. It’s also increasingly where the middle-aged to older users with money to spend are to be found, a very attractive prospect for advertisers.

As Brian Solis recently pointed out, heavy users of Facebook spend significantly more online than the average internet user. “If you are in online marketing you cannot ignore that kind of spending power in a medium as broad as Facebook,” says Newlands. “Those that took advantage of Google advertising before everyone jumped in effectively got cheap traffic which is much more expensive to buy; we are seeing the same thing with Facebook ads.”