During last week’s Facebook earnings call COO Sheryl Sandberg argued that the company could and would compete for marketing dollars “throughout the entire marketing funnel.” That is, from branding and awareness at the “top” of the so-called funnel to “demand fulfillment” at the “bottom.”

Below is the quote in broader context:

We believe we are very well positioned to compete for advertising dollars throughout the entire marketing funnel, from the very top where companies focus on generating demand, to the bottom where the focus is on fulfilling demand. The majority of the advertising spend that is migrated online to date has been for demand fulfillment, which happens when a customer already has intent to purchase. Search advertising has been the primary driver of this migration. Facebook is also effective at the bottom of the funnel, with gaming being a primary example. But we believe that Facebook also helps marketers build brands and generate demand. This is important because the majority of the $600 billion global advertising market is spent on demand generation.

(Emphasis added.)

Right now Facebook doesn’t truly compete for ad dollars in the “demand fulfillment” category. As Sandberg implies this is where Google reigns. But Facebook doesn’t need to directly compete with Google in web search to participate in search revenue or bring the site more fully into the demand fulfillment arena. (Sandberg & Co may be thinking of novel alternatives to search but search is the most direct way in.)

A couple of weeks ago Director of Facebook Engineering Lars Rasmussen, a former Google employee, told the Sydney Morning Herald that it made no sense for Facebook to get into web search. I agree; the company probably wouldn’t compete effectively against Google and it would create problems for Facebook’s relationship with Microsoft.

However search on and within Facebook can continue to improve to the point where it becomes a valuable utility and search revenues start flowing. As Greg Finn pointed out recently, Facebook is already testing sponsored results in site search.

Last week on my personal blog I wrote about Facebook’s Massive, Still-Untapped Local Opportunity. One of the comments to that post was the following: “The problem FB faces is that none of us use it to find local businesses when we need one. So unless FB finds a way to change that, no SMB will ever derive any value from advertising with FB.”

Exactly. One way to change that is to make search within Facebook a real honest-to-goodness tool that people actually use to find things. Once that happens, you’ll see local businesses and brands respond with more content and with search-like ad campaigns. We would also likely see products and product catalogs showing up.

The combination of social signals (Likes) and other content could make Facebook search a compelling tool that people would start to use for all kinds of queries. But that’s all contingent on the degree to which Facebook invests in and develops its own search capability.

It’s not just about revenue. Better site search would make the overall Facebook experience much better. It would lend a kind of “coherence” to the site that’s currently lacking.

In a way it doesn’t matter if Facebook ever does anything with “web search” if it dramatically improves search on Facebook. It will achieve the same result: getting people to use the site when they have “intent to purchase.” Then, and only then, will Facebook truly be in the “demand fulfillment” business.