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General Motors Co. GM +2.29% plans to stop advertising with Facebook Inc. after deciding that paid ads on the site have little impact on consumers' car purchases, according to a GM official.

The move by GM, one of the largest advertisers in the U.S., puts a spotlight on an issue that many marketers have been raising: whether ads on Facebook help them sell more products. On Friday, Facebook is expected to sell shares in an initial public offering that could put a market value on the company of as much as $104 billion.

Do advertisers have any idea how to use Facebook to their advantage? The answer will determine if the social network sinks or swims in the public market, says Rolfe Winkler on Mean Street. Photo: Reuters.

Executives have spent the last two weeks trying to convince investors that its advertising business makes it worthy of a sky-high valuation.

GM will continue to promote its products on Facebook, but without paying the social-media company, the GM official and other people familiar with the matter said. Many companies maintain free Facebook pages.

GM's decision raises questions about the ability of Facebook to sustain the 88% revenue growth achieved in 2011. Facebook said last month its first-quarter ad revenue was down 7.5% from the previous three months. Facebook blamed "seasonal trends" for the decline, as well as a greater number of users from outside the U.S., where ad rates are lower.

GM spent only about $10 million last year to advertise on Facebook, according to people familiar with the matter. That is a fraction of GM's total 2011 U.S. ad spending of $1.8 billion, according to Kantar Media. It is also a tiny share of Facebook's total 2011 revenue of $3.7 billion, most of which was advertising sales.

GM is the third-biggest advertiser across all media in the U.S. after Procter & Gamble Co. PNG -0.16% and AT&T, T -0.48% according to Kantar.

The auto maker's marketing chief, Joel Ewanick, said the company "is definitely reassessing our advertising on Facebook, although the content is effective and important." Mr. Ewanick has spent the last year restructuring the Detroit company's marketing operations in an effort to cut billions of dollars in costs.

Content refers to the unpaid Facebook pages GM and other companies use to promote their products. GM spends about $30 million on content created for the site, including on agencies that manage the content and daily maintenance of GM's pages, people familiar with the figures said.

GM started to re-evaluate its Facebook strategy earlier this year after its marketing team began to question the effectiveness of the ads, the people said.

Mr. Ewanick and other GM marketing executives met with Facebook managers earlier this year to discuss their concerns. But the auto executives left unconvinced that advertising on the website made sense, according to people familiar with GM's thinking.

At the meeting, Facebook criticized GM's approach of having multiple firms managing its advertising for the site, according to another person familiar with the matter. GM has been revamping its marketing, hiring a new ad firm to buy its media.

Many ad executives believe Facebook's global audience of 900 million registered users makes the site too big to ignore.

Earlier this month, a top marketing executive from the U.S. division of Kia Motors Corp. questioned the value of Facebook ads, saying it was unclear how paid ads help sell cars. However, the South Korean auto maker said it still planned on increasing its ad spending on Facebook this year.

"Companies in industries from consumer electronics to financial services tell us they're no longer sure Facebook is the best place to dedicate their social marketing budget—a shocking fact given the site's dominance among users," said Nate Elliott, an analyst at market research firm Forrester, in a company blog post on Monday.

Other auto makers are more confident about Facebook's value as an ad outlet. "We have committed to Facebook for more than $5 million [in ad spending] this year and if the return on investment is there we will spend more next year," said Dean Evans, chief marketing officer of Subaru of America. "Half the U.S. population is on Facebook, you have to work it to learn it," he added. Mr. Evans said he has been happy with the return his ads have had so far.

Keeping auto manufacturers engaged is critical for Facebook. The auto industry is the largest pool of U.S. advertising dollars and often can make or break a marketplace. Automotive companies and car dealers shelled out $13.89 billion on U.S. ads across all media last year, according to Kantar.

Rex Briggs, CEO of marketing analytics firm Marketing Evolution Inc., said auto makers like GM are used to marketing campaigns that feature splashy TV ads or give big discounts on cars to bring people into stores. Mr. Briggs, who has worked for GM in the past and now works with other auto makers including Honda Motor Co. HMC -1.89% on determining their return on social media campaigns, said auto makers can't afford to ignore tools that can help improve people's feelings toward a brand.

"As long as Facebook is the bedrock of consumer engagement, advertisers can't ignore it," said Craig Atkinson, chief digital officer of PHD, a media buying firm owned by Omnicom Group Inc. OMC -0.18% He noted, however, that Facebook has to prove "they can convert that fan engagement into a business outcome for marketers… It's about giving the finance people, who are cutting the checks, proof that its ad products work."

Marketers have been enamored with the size of Facebook's audience. Many have spent millions of dollars on hiring digital ad firms and creating content for their Facebook pages in order to stimulate buzz, which advertisers liken to word-of-mouth marketing campaigns.

Still, a lot of the activity in the early days didn't involve paying Facebook for ads. Now, however, many advertisers also pay Facebook, which has introduced several ad products in an effort to generate revenue.

One service, called "sponsored stories," lets advertisers pay to republish positive Facebook messages that people had posted about their brand.

Facebook has long argued to marketers that unpaid content—like brand pages and building a base of online fans who like a brand—is successful when coupled with paid advertisements like display ads and its "sponsored stories." Without the additional paid ads, Facebook executives have said, it's hard for users to learn about the unpaid content.

Facebook said in March, for example, that only 16% of a brand's fans will see a post about the brand without paying. If the brand pays Facebook a fee per ad, Facebook will use technology to ensure that the ad is seen by 75% of those who click a company's "like" button on its website.

Rick Summer, an analyst at equity researcher Morningstar Inc., said that GM's decision only proves that advertising on Facebook is still in its early stages, which should be a lesson to investors hoping to get in on the company's IPO.

Mr. Summer, who has rated Facebook at a "hold" at $32 a share with a $96 billion valuation, said that it will take Facebook a very long time to build up its advertising business in a way that can justify its lofty valuation. Facebook Monday set a price range for its IPO of $34-$38 per share.