I often get asked, “Is running Facebook ads expensive?”
Honestly, I struggle to answer that even though it may sound like a very simple question. The reason is because “expensive” in this case is relative, and it depends on whether you know how to measure the effectiveness of a campaign.
If you know how to calculate your customer lifetime value, you would think spending $10k/month on FB ads (to eventually get $30-$50k of sales) is not expensive.
And one of the most important aspect of running Facebook ads is knowing how to measure the effectiveness and ROI of your campaigns.
Before diving into understanding the marketing metrics and how effective your ads are, first you need to estimate your marketing budget for your product/service.
How to roughly estimate your marketing budget
You need to calculate your cost needed for your product/service and how much you are willing to fork out for marketing. If you are selling a product now at $100, and your cost price for that product is $30, your profit is $70. Say you are willing to set aside another $20 per product on marketing to drive up sales volume, your total profit after marketing and product cost is $50. That’s a 50% profit margin and it’s considered pretty good.
If you are a private tutor charging $200/month for your tuition, and you know once a student engages you, it will be ongoing for at least 6 months ($1200), then how much would you be willing to spend on marketing to acquire a student?
If you are a real estate agent, and you know for every 100 customers you meet, you can close 10 deals, how much are you willing to spend to acquire a customer?
In your own industry, be it selling a service or product, you need to know your own calculation well. At the end of the day, it has to make financial sense for you to be running paid ads for it. Once you have done your calculations and have set aside a budget for marketing, you can then start to optimise and run your campaigns.
Now, I am going to explain what certain marketing metrics mean, and which are the metrics that matter the most to us as small business owners.
Click-through rate (CTR)
CTR tells you how many % of the people who saw your ad actually clicked on a link to learn more. You can explore more in the dashboard on the definition. But here, my own guideline is that anything below 1% means my creative sucks. Maybe I’m using a video/photo that is not interesting enough to get people to click and learn more.
Sometimes, the creative you use can have really good CTR but a few months later, the CTR will decrease. This is called ad fatigue, which means people are bored of the same old ads and you need to have new creatives. You don’t need to have in depth video editing skills to create nice looking videos. In fact, in Facebook ad platform itself they have some tools to assist you. For me, I prefer using video making mobile apps to churn out a creative fast. You can do a quick search of “video editor” in iOS app store to see the available ones. I use one called Videoshop and it does its job of inserting texts, adjusting the filter of the video and inserting sound clips!
Videos have proven to have 5x more engagements than a still image. Nevertheless, in each adset, you should strive to have at least 1 video and 1 still image and let Facebook’s algorithm do its job by showing the best performing creative for you.
These days where attention span of people are short, you need to capture their attention in the first 3 seconds. A mobile-optimized video should be only about 15 seconds long.
Cost per impression (CPM)
CPM tells you how much it costs for your ad to be seen 1000 times. Cost per 1000 impressions. A person may see the ad twice a day, and that’s considered 2 impressions. CPM doesn’t help us much to make decisions, but it gives us a rough idea of whether our targeting is too broad or too specific. If you target a small specific group of people to see your ads, very likely your CPM will be high. But if the leads are coming in, then it’s fine.
Cost per lead (CPL)
Cost per lead is calculated by your ad spent divided by the number of leads you receive. If you spent $100 to get 20 leads, your cost per lead is $5. Is it expensive? Again, you have got to do your own calculations. If I spend $200 to get 40 leads (cost per lead $5), and out of this 40 leads, 1 lead bought my $1000 product, is it worth it? To me, the answer is yes, it’s worth it because my return on ad spend (ROAS) is 5. Which brings me to the next metric:
Return on ad spend (ROAS)
This is simply calculated by how much your revenue is divided by how much you spent on ads. In my example above, my revenue was $1000, my ad spent was $200, thus, I made a return of 5x.
Would you spend $200 to get $1000 worth of sales? For me, I run a shopify store selling my music products. ROAS is the metric I look at to make quick decisions whether to kill off the ad campaign or not. ROAS at one glance let you know if you campaign is bringing you the revenue. This is only possible if you are running a campaign to sell products and you can track your product sales straight.
However, if you are selling a service, calculating ROAS may not be that simple especially if you are collecting leads first then selling via your emails.
Cost per acquisition (CPA)
CPA is how much you spend to acquire a customer or a sale. This metric is important. Again, you need to calculate how much cost per acquisition makes sense for you. Selling a product for $100, but spending $100 to acquire that sale is actually loss making for you. Don’t forget all the costs needed to bring in that product or service.
Now that I’ve explained the important marketing metrics to look at, will it help you to make better decisions if you are running fb ads? Let me know your comments below.
