How much does it cost to advertise on Facebook?
How much should I spend on Facebook Ads?
These are the two questions that I hear the most when I talk to marketers who are first thinking about how to run a Facebook Ad. And so it should be. Marketers need to be be able to estimate their ROI above anything else.
Here’s the answer: Spend less on each customer you get through Facebook Ads than they are worth to you.
But how do you know much an average customer is worth? And how do you know if you’re spending less than that on your Facebook Ads?
Let me explain.
Facebook Advertising Costs Principle #1: CPC, CPM, CPL, CPA & Cost-Per-Customer of your Target Audience
Ok, first, let’s take a look at how Facebook charges you to advertise on their platform and the factors that affect how much it costs.
CPC, CPM, CPL & CPA Explained
When you setup your Facebook campaign budget, you need to choose between two-four pricing options. CPA is only available if you choose “Website Conversions” as your “Ad result” in the the Ad creator on Facebook.com. CPL is only available if you choose “Page Likes” as your “Ad result”.:
CPC (cost-per-click): If you use cost-per-click pricing, you only pay when someone clicks on your Facebook Ad.
CPM (cost-per-mille): With cost-per-impression you pay when Facebook shows your ad 1000 times. (Impressions are the number of times your ad is shown to a user on Facebook).
CPA (cost-per-action): This allows you to track and optimize how much you spend to get someone to take an action (or convert) on your website after clicking your ad.
CPL (cost-per-like): This allows you to track and optimize how much you spend to get someone to “Like” your Facebook Page after clicking your ad. Learn more about how to increase Facebook Likes using Facebook Ads.
Calculating your Cost-Per-Customer (The Only Cost You Need to Care About)
Cost-Per-Customer is the one number you need to watch. It is the cost of getting one person to buy from you. All of the other cost numbers are just parts of the equation for calculating your final cost of getting one new customer.
Here’s how to calculate it:
Using Facebook’s built-in CPA tracking, where we can first get the cost of the initial action the user takes on our website. If that action is to make a purchase, then your CPA is equal to your Cost-Per-Customer. But if your action is to download an ebook, sign up for a newsletter or some other form of lead-generation, then you need to add one extra variable to the equation:
CPA x (Number of Leads that Buy / Total Number of Leads)
What is the average CPC?
A recent article from Search Engine Journal reported that the average CPC for retail advertisers in Q3 of 2013 was just $0.45 USD. Which is a 27% drop from the year before. In Q3 of 2012 the average CPC was $0.62 USD. Check out the graphs below to see how the average CPC changed from Q2 2013 - Q3 2013. The report findings are based on 200 billion Facebook Ads.
The default pricing option that Facebook sets for your ad is a “cost per click” (CPC) bid. This is a good option for when you’re first starting out, as the click through rate (CTR) for Facebook Ads is lower and paying for clicks is ultimately cheaper than if you were to pay for the same number of impressions (CPM).
Depending on your ad’s performance, you may want to switch your Facebook bid from CPC to CPM - especially if it’s doing well with a high click-through-rate. But be sure to monitor impressions and clicks. If impressions on your ad increase and clicks decrease, your cost will increase and you may need to switch back to CPC pricing.
After choosing your payment method, you can choose to set your own bid or allow Facebook to optimize your bid for you. Unless you’re an advanced user, we recommend allowing Facebook to optimize your bid.
Choosing a Target Audience for your Ads
Your Target Audience is the group of Facebook users who will potentially see your ad. Facebook has a very deep knowledge of users’ demographic, employment and interest information to target people based on. Want to target 45-year old women in Kansas City who like cats? No problem! You can even target specific individual’s with your ads using only their email address or phone number. This is called “Custom Audience” targeting. Learn How to Target Facebook Ads Based on Email Address & Phone Number (Custom Audience).
If you’re interested in learning how to create a target audience, check out our recent article, How to Create a Targeted Facebook Ad Audience.
Why some target audiences have higher CPM and CPC
In a nutshell, the more advertisers there are for a particular target audience, the higher the cost will be to advertise to it - basic supply and demand. If you’ve ever run Google Adwords, you’ve experienced the same thing. The more people try to advertise for a particular search keyword, the more it costs to advertise for it.
Under Principle #3, Optimizing your Ad Spend (Budget), we’ll look at how to find the lowest CPC and CPM for your Target Audience.
Facebook Advertising Costs Principle #2: Your Average Value Per Customer
Now that you understand how Facebook Ads are priced, you need to look at the other side of the equation, which is how to calculate how much value (revenue) your ads generate for you. The best way to do this is to calculate your average value per customer, so you can easily match up against the Cost-Per-Customer that we calculated above.
Calculating your Average Value Per Customer (AVC)
AVC is the average order amount of each customer.
If you have a one-time payment business model, meaning someone pays you a one time fee for each product or service, this is the equation you use to calculate the average order amount:
Total Sales Revenue / Number of Customers
Now, if you’re a larger business and have multiple product categories, you may need to create segments based on those categories. For example, the average order amount of electronics will be much higher than that of cleaning supplies.
Calculating AVC for Reccurting Revenue Models
If you have a recurring revenue model, meaning people pay you on a weekly/monthly basis for a product or service, this is the equation you use to calculate the average order amount:
(Total number of recurring payments/number of customers) x ((Recurring Payment Price #1 x Number of Customers Paying this Price) + (Recurring Payment Price #2 x Number of Customers Paying this Price) + … / Total Number of Customers)
In the next section I’ll show you the one number you need to watch to know if your Facebook Ads are successful or not.
Pro Tip: An easy way to track your Cost-Per-Lead without having to deal with messy tracking codes between your Facebook Ad and your website is to use Wishpond’s Facebook Ad Manager with Wishpond’s Landing Page Builder. These are both integrated within your Wishpond account to allow you to track your Cost-Per-Lead (as well as every other metric) without having to set up your own tracking codes.
Facebook Advertising Costs Principle #3: Optimizing your Ad Spend (Budget)
So, now that you know how to analyze your Facebook Ads to make sure they are making you more money than you are spending on them (a.k.a. profitable), how much do you spend each week/month? And how do you optimize your ads to make them as profitable as possible?
The one number you NEED to watch
The one number that you need to be focused on at all times is your average-value-per-customer minus Cost-Per-Customer. This is, how much money your average customer brings you minus the amount you need to spend on ads to get one customer. If this number is above zero then your ads are profitable. And the higher the number, the more profitable they are.
At the end of the day, every other number is just a vanity or incomplete metric. This is the only one that truly affects the bottom line of your business.
While there are a number of best practices on how to advertise on Facebook, the only way to optimize your Facebook Ads to maximize their ROI is to test, test, test. Specifically, A/B split test.
A/B testing is a strategy in marketing in which two versions, A and B, (the Control and the Treatment) are tested against each other. The goal is to identify changes that increase the chance of the what you want to occur, occurring.
It’s used commonly for webpages, landing pages, marketing emails, and advertising. The best practices remain essentially the same across the board though:
Change the placement and formatting of objects on a page to get a user’s eye to where you want it
Change colors to ensure primary objects stand out
Change images to be eye-catching or elicit emotion: encourage engagement
Change text to be appealing to the reader, and encourage a desired outcome
Want to know more? Click to learn How to A/B Split Test your Facebook Ads to Maximize ROI.
Don’t fall victim to Facebook Ad Fatigue
Facebook Ad Fatigue occurs when your ad’s target audience is shown your ad too many times and your Click-Through-Rate drops as your Frequency rate (how many times it’s seen) increases.
Why this happens: Users are shown your advertisement frequently (every time they sign into Facebook - on average 13.8 times/day according to recent data) Your ad is competing against photos and statuses on Facebook user’s News Feeds. People become inured to your advertisement and your Click-Through-Rate (CTR) drops.
Rotating the variables within your ads (Ad Rotation) stops Facebook users from becoming Ad Fatigued. Ideally, as soon as your ad starts losing efficacy it gets rotated out and replaced with a different version.
Does Facebook Optimize my Ad Spending for me?
Yes - Facebook does optimize your target audience for you, based on who is clicking or converting on your ad. But, to be honest, the optimization they do is fairly minimal. Using the above techniques optimize your ads far better than Facebook will.
Bonus: What is CTR and How Does it Affect Facebook Advertising Costs?
CTR (Click-through Rate): This is the percentage of people who click on your ad divided by the total number of people who saw your ad. For example, if 100 people see your ad and only 1 of them clicks on it, your CTR is 1%.
Unlike Google Adwords, Facebook does not have any documented Quality Score. For Google Adwords, your Ad’s Quality Score is affected by how high your click-through-rate and long-click-rate (number of people who stay on a website after clicking on an ad for it). Unfortunately, this is not the case yet for Facebook Ads.
Written by Nick Steeves
More Free Resources on Facebook Advertising
- 6 Facebook Ad Image Best Practices that to Boost your Click-Through-Rate
- How to A/B Split Test your Facebook Ads to Maximize ROI
- The Science of Optimizing your Facebook Advertising Campaigns
- 7 Facebook Ad Call-To-Action (CTA) Tips, Techniques & Best Practices
- How to Run a Facebook Ad that Gets Clicks
- The Complete Guide to Facebook Ads (Ebook)
Want an easier tool to manage & optimize your Facebook Ads?