How To Advertise On Meta (Facebook & Instagram): Demystifying How Ads Work
Facebook always seeks to increase its ad revenue. Here's an insider's approach on using Facebook advertising to boost performance without blowing your advertising budget.
Online, various sources will provide you inconsistent information about how Facebook advertising function (and how to advertise on Facebook).
In actuality, it's complicated. Most account managers and developers are unaware of how it operates. Additionally, algorithms and machine learning are always evolving.\
The best strategy is to always:
- Think logically if the guidance you are receiving even makes sense in light of Facebook's incentives.
- Test if it can enhance performance, try it out first, Then
- Update your assumptions in light of what you have learned
Keep an eye out for algorithm changes
Facebook announced a new update to its news feed algorithm in January 2018, which prioritizes posts from friends and family in order to foster "more meaningful social interactions."
As a result, it became more difficult for brands, media publishers, and marketers to reach their target audience organically. It also had an effect on ad prices; according to AdStage, Facebook's CMPs increased 91% year over year in Q1 2018.
The platform's CEO, Mark Zuckerberg, stated at the time that this change would likely result in more users spending less time on the platform, resulting in higher ad prices.
Furthermore, there was a significant update to ad limits in late 2021:
Since each ad’s performance improves the more it is shown, advertisers of different sizes should use different ad volumes to improve ad performance. We will be introducing four limit tiers to encourage advertisers of different sizes to use an ad volume per Page that optimizes their performance.
The size of the advertiser is determined here based on their highest spending month in the previous year. And so:
- Pages with under $100K spending will be limited to 250 ads;
- Pages with under $1M spending will have 1,000 ads;
- Pages with under $10M spending – 5,000 ads;
- Pages with more than $10M spending – 20,000 ads.
Should you be concerned? Not necessarily, but these algorithm changes enable us in answering an important question: What does Facebook want?
The answer is to make more money.
Although Facebook's algorithm is constantly changing, here's a simplified calculation of how Facebook ads work in general:
$$$ per User = CPM * # of Ads
# of Ads
If Facebook users become irritated and leave, advertisers will no longer be able to target them. As a result, in order to avoid overwhelming users with ads, the platform must strike a delicate balance between providing engaging content from friends and sponsors.
That is one of the reasons for the existence of ad relevance diagnostics.
If users dislike your ad or do not engage with it, Facebook's advertising algorithm will dislike you as well and will most likely charge you more money or simply refuse to show your ad to their users.
This is where Ad Relevance Diagnostics comes into play. It evaluates your ad in terms of quality, engagement, and conversion rate ranking and advises you on how to improve.
CPM
CPM, or cost per mille, is a cost calculation that determines how much it would cost to receive 1,000 impressions on your Facebook ad.
Advertisers are willing to pay a higher CPM to show ads if Facebook does a better job of finding the right users (impressions). That is why their team works so hard to expand targeting options and improve the efficiency of their advertising algorithms.
This is how the math works:
$50 Conv. Value * 2% CVR * 1% CTR = $10 CPM
- Conv. Value = Revenue per Conversion
- CVR = Conversion rate
- CTR = Clickthrough rate
- CPM = Cost per Mille (1,000 impressions)
$50 Conv. Value * 2% CVR * 2% CTR = $20 CPM
If Facebook matches you to users that click twice as often, they can earn a 2x higher CPM.
$50 Conv. Value * 4% CVR * 1% CTR = $20 CPM
The conversion rate is the same. Double the conversions means they can charge double the CPM.
Conversion Objectives
Facebook needs to know what your goal is in order to match you with the right users. This can range from website clicks to app installations to video views. There are numerous options available on Facebook depending on the type of ad you want to run.
If it's website clicks, they'll match you with people who have a high clickthrough rate on ads in the past.
If they're looking for conversions, they'll look for people who are likely to convert based on what they've seen on your pixel thus far.
The more information they have, the better they will be able to match your ad to the exact type of user who will convert.
But how do they match you with the right users?
Assume we only had 10 Facebook users, each with a different likelihood of converting and some more expensive to reach than others.
Other advertisers are also attempting to reach these users, possibly using different targeting than you are.
So the first thing they'll do is sort these users by their likelihood to convert (or click, if that's your goal).
They'll then determine which are the least expensive to reach. Let's take the cheapest 40% of our audience.
When Facebook shows your ads to these people, they know they're giving you the best chance of success while also making the most of your budget.
The real algorithm is much more complicated, but the basic idea is the same:
- Find the best users in your audience;
- Do it at the lowest possible cost;
- Improve the efficiency of your budget;
- Keep you coming back for more.
You'll notice that Facebook doesn't just arbitrarily reduce my CPM: I'm paying $2 for Dave because he converts better than any cheaper options below him.
I ignore Sarah and Sally entirely: Facebook can now sell those impressions to other advertisers who they know are more likely to convert and will pay a much higher CPM.
That is how Facebook earns more money while saving advertisers money.
Of course, they do all of this at breakneck speed using complex machine learning algorithms with millions of variables, but you get the picture.
Your company isn't built on someone clicking a Facebook ad. Neither should your strategy. Speak with a strategist.
Funnel Optimization Using Facebook Ads
Improving your conversion rate, revenue per conversion, clickthrough rate, or targeting directly affects your bottom line.
That’s why it is critical to test new ad creatives (CTR), landing pages/onboarding (to improve conversion rate), and CRM campaigns (Revenue per user).
You can either take the cost savings and bid lower on CPM to increase profitability, or bid higher on CPM to increase volume (attract more of the Daves and Bills of the world).
Lookalike Audiences
You might be surprised to learn that every Facebook audience is a lookalike audience. Even if the example above was "Millenials who like Dogs and buy Pet Food in Manhattan," Facebook has only shown your ad to the top 20% of that audience.
It's why you rarely reach the entire audience and why increasing spend hurts performance — everyone else is either too expensive or not as interested in you.
Lookalike audiences work in the same way, but with a country's entire population. Have you ever noticed how a 1% resemblance to any conversion event or email list for any client always equals the same number of people?
It's because they're ordering the entire country based on their likelihood to convert on your pixel, and then only the top 1% of those people are added to your audience.
Because Facebook's algorithm is better than a human at determining "likelihood to convert," this approach is wildly successful and performs incredibly well. Furthermore, it locates people who are less expensive than usual.
For example, you may be aware that your product is used by Entrepreneurs who, like Gary Vaynerchuk, use Mailchimp, are 25-35 years old, and live in New York.
BUT DID YOU KNOW that there are numerous small pockets of entrepreneurs in states such as Texas and North Carolina?
Do you have a comprehensive list of every startup influencer and email service provider?
Can you identify the few 45-year-olds who would be interested in your product?
Facebook is capable of all of the above. They have many orders of magnitude more information than you do. More importantly, they can determine what is more important in predicting whether someone will convert.
That is why lookalike audiences work so well, Facebook is one of the best ad platforms ever created, and we continue to use it on a daily basis.
Your company isn't built on someone clicking a Facebook ad. Neither should your strategy. Speak with a strategist.
How to Choose an Objective
Facebook requires data in order to do what it does best. As a result, if you place a conversion pixel too far down the funnel, it will not reach the right people.
If you choose an objective that is too far up the funnel, such as clicks, it will optimize to people who are likely to take that action, regardless of whether they are likely to convert further down the funnel.
Unfortunately, clicks do not always equate to conversions.
I've seen click campaigns drive much higher CTR on the same audience, but at a much higher cost per acquisition due to a poor conversion rate.
And that doesn't even take into account revenue-generating factors like qualified vs. unqualified leads, average order size, lifetime value, and so on.
Here's how each objective works:
Conversion Objective
$20 CPM * 0.5% CTR * 2% CVR = $50 CPA
Click Objective
$20 CPM * 2% CTR * 0.2% CVR = $125 CPA
Bid Strategies
The campaign objective influences not only Facebook's ability to target the right people in your audience, but also the bid strategies available to you.
The following are the most common propositions:
- lowest cost - focuses on delivering the most results for the least amount of money, but you have no control over the cost, so a lead could cost you $1 or $100;
- cost cap - provides consistent results, and the overall cost will average around the cap you set (for example, if the limit is $25, some leads may cost you more than the set limit, but the average cost per lead will not be higher than that at the end of the month);
- bid cap - centered on profitability, which means the algorithm will bid below the limit you set (for example, if the limit is $25, you will usually pay less for your leads).
If your objective is conversion, start with the lowest cost and a set budget, and once you've found the median, switch to a cost cap strategy.
Your company isn't built on someone clicking a Facebook ad. Neither should your strategy. Speak with a strategist.
Lifetime Budget
As you might expect, some hours, days, or weeks on Facebook are more expensive than others. If Disney is releasing a new film, you can bet they'll spend millions buying up all the inventory, raising prices for everyone else.
Moving to a lifetime budget is one way to improve performance. This gives you less control over how much you spend per day and requires more fiddling when the campaign ends, but it allows Facebook to spend less on expensive days and more on cheap days for you.
Actionable Takeaways
- Default to conversion campaigns. You cannot change this afterwards (from Traffic to Conversions), but you can still use a conversion campaign to optimize for clicks or impressions.
- All of your organic traffic that converts on your pixel helps Facebook learn.
- You'll get a lot of low-quality clicks if you optimize for clicks. Every campaign should have a conversion objective (driving awareness is worthless).
- Default to higher up the funnel. Try optimizing the first stage of your funnel to get additional data. You don't want excessive amounts of low-quality traffic.
- Watch your funnel like a hawk and make sure each stage is optimized to increase ROI.
- When preparing for campaigns, learn how to perform these funnel calculations.
- Recognize that your campaign will cost more the more volume you require.
- Don’t assume that ads with high CTR will also have high CVR
- Use CPA caps and target bids only if you are prepared to pay nothing.
- If the constancy of daily spending is not a problem, choose the lifetime budget.