I wish someone told me back in 2009 what I’m about to tell you. When it come to Facebook Advertising, there are three basic laws – or formulas, if you prefer – that you need to know if you want to make an impact with your ad spend on Facebook.
Understanding how these three formulas work will save you many headaches, not to mention thousands, maybe millions of dollars in ad spend. They can quickly shine a light into the black box of Facebook advertising and help transform your ad budget from a cost center to a competitive advantage.
Law One: Action Rate
Let’s begin with the simplest part of the 3 formulas, Action Rate.
Action Rate = CTR * Conversion Rate
This is equivalent to Conversions/Impressions.
If you multiply this by 1000 you get Actions per Million Impressions, or APM.
APM = (Conversions/Impressions)*1000
Action Rate is a very handy metric. Facebook’s auction directly leverages it to judge the relevancy of an ad. It will subsidize or penalize an ad based on how this metric compares to others in the auction.
To the algorithm, relevancy to the end-user of the platform is called eCPM. The higher the eCPM, the more “relevant” it is to the customer of Facebook.
eCPM = Advertiser Bid * CTR * CVR + f(Social Metrics)
or
eCPM = Advertiser Bid * Action Rate + f(Social Metrics)
The ad with the highest eCPM, or Total Value, wins the auction.
Simple.
You may note that the Advertiser’s bid is a prominent feature of this equation. What does this mean? Facebook will subsidize the cost paid by the advertiser if the ad has a great action rate and/or social metrics. You should be aware that this also works in reverse. If the ad has a poor action rate and/or social metrics (e.g. negative feedback), then the advertiser has to pay more to receive the same impressions.
Law Two: CPA
Taking the Action Rate and turning it into APM allows the following to be true:
CPA = CPM/APM
Let’s say the CPM is $10. If a brand’s CTR is 2% and the Conversion rate is 2% then the action rate is 0.0004. Multiplying this by 1000 makes the APM 0.4.
The CPA of the brand would then be $25 since it is 10/0.4.
If your company’s goal is a specific CPA target, then you only need to monitor two inputs and how they relate to one another or change over time.
Law Three: ROAS
Another consequence of APM is the following
ROAS = (APM*AOV)/CPM
This one looks complicated but as a marketer, you already know what it means. If you want to increase ROAS:
- Increase the frequency someone purchases when seeing an ad: APM
- Increase the amount they buy when they purchase: AOV
- Decrease the cost to show the ad: CPM
In our example above, if we keep CPM at $10 and the APM at 0.4 and introduce an AOV of $45 then the ROAS is 1.8.
If your company’s goal is ROAS, then this law greatly simplifies the inputs to track — especially if AOV is steady for your brand. You may only need to track two other metrics outside of ROAS to understand how the platform is performing for your business.
There you have it, the 3 laws of Facebook advertising . You may not realize it, but these formulas cover a ton of ground and can do a lot of heavy lifting for you. In short, Action Rate, or a simple scaling of it, allows an advertiser to jump seamlessly between ROAS, CPA, and what is influencing the auction.
You can even compute APM for most digital platforms and leverage these formulas to help compare the pros and cons of diversifying your budget into separate channels.
To review, the 3 laws of Facebook Advertising are as follows:
- eCPM = Advertiser Bid * Action Rate + f(Social Metrics)
- CPA = CPM/APM
- ROAS = (APM*AOV)/CPM
When faced with a marketing challenge on one of Facebook’s platforms, remember these 3 key laws. When you put them to work, a solution may be closer than you think!
See related post: Four Important Advice When Doing Facebook Advertising:
[Images – Main Photo by ThisIsEngineering from Pexels; Woman Photo by Godisable Jacob from Pexels]
Nate Lorenzen is the cofounder of Dysrupt, an expert-driven marketing firm. Previous to Dysrupt, Nate was a founding member on the US eCommerce team at Facebook.