Ecommerce startups and fledgling brands often struggle to stay visible and relevant in the intensely competitive world of social media. As paid social has become more than just an optional tool in the social media marketing toolbox, growing brands must learn how to efficiently wield it to carve for themselves a secure place within their industry. However, few brand owners, managers, and marketing experts realize that using Facebook ads efficiently also requires careful strategizing.
Facebook Ads Manager simplifies the process of launching an ad campaign online. However, a successful paid social ad on Facebook is not as simple as ticking all the appropriate boxes for your brand/product campaign. You must know how to properly calculate ad costs and optimize your campaign to maximize profitability and to achieve all other goals.
We have prepared this Facebook ads budget and cost calculator to help you gain the highest possible returns for your money.
How much do Facebook Ads cost?
Facebook offers different ad rates to fit different budgets. And one great thing about Facebook ad costs is that once you select a budget, you will be guaranteed that fixed cost per day. You won’t ever have to worry about going over your ad spend allotment — which is a typical problem with traditional marketing collaterals.
So the more important question you should ask yourself is, “How much should you spend on Facebook ads?”
Even with the variable pricing options and built-in campaign “optimization” offered by Facebook Ads Manager, you must have your own spending guidelines for social media ads. Don’t make the mistake of just picking the pricing option that suits your budget and tweaking your campaign using Facebook Ads Manager’s generic and short-sighted metrics. You need to make every dollar count towards a measurable and significant growth for your brand.
Business costs and profit goals
Your profits are, of course, one of the key measures of business growth, and your profit goals should guide your decisions on how to scale your ad spend, how much to spend, and where to spend it. To properly calculate how much you should be spending for Facebook ads, you must do a profitability analysis.
Once you have determined the right profit goal, you’ll be better equipped to manage and optimize your ad spend based on the following metrics.
Cost Per Thousand Impressions (CPM)
One impression is equivalent to one ad view, i.e., when someone views your ad. CPM is a measure of how much you have to spend to get 1,000 impressions. To calculate your CPM, use the following formula:
CPM = (Ad Spend x 1000)/Total Impressions
The higher your total impressions, the more cost effective your Facebook ad campaign is, and vice versa. For example:
If your ad spend is $25, and your total number of impressions is 1,000, your CPM would be:
CPM = (25 x 1000)/1000
CPM = $25
To compare, if your total impressions is only 500, then your CPM would be higher — $50 to get 1000 impressions. Your goal then should be a higher total impression to make your ad spend cost effective.
Outbound Click Through Rate (CTR)
The click through rate measures the total number of people that clicks on the ad, out of everyone who has viewed it. Your CTR will tell you if your ad is creating enough interest to convince people to click on it. CTR can be calculated using the following formula:
CTR = Number of Clicks ÷ Number of Impressions x 100
The higher your CTR, the more successful your ad campaign is.
Outbound Click Through Rate (CTR)
Your CPC will indicate how much each click on your ad, which brings customers to your website, is costing you. A low CPC means more clicks for your budget and indicates a good conversion rate for your website; a high CPC indicates fewer clicks for your budget and that you need to optimize your website to get a better return on your investment (ROI). You can calculate CPC with the following formula:
CPC = Ad Spend ÷ Outbound Link Clicks
Cost Per Unique Add To Cart (CPUATC)
This indicates how much it costs you when a customer clicks your ad, goes to your website, and adds a product to their cart but doesn’t complete the purchase. You can get the cost per add to cart by using this formula:
CPUATC = Total Cost ÷ Adds to Cart
*Adds to cart refers to the total number of people who added items to their carts but did not purchase
Cost Per Unique Checkouts Initiated (CPUCI)
This metric lets you know how much it costs you to get someone to get as far as initiating the checkout process. The formula is:
CPUCI = Total Amount Spent ÷ Unique Website Checkouts Initiated
ROAS (Return On Ad Spend)
This metric lets you know how much return you get from your initial ad spend. When calculating your ROAS, don’t get fixated on a single-account return and don’t be too hasty adjusting the numbers in real time.
ROAS = Total Revenue ÷ Total Spend
Conversion Rate (CR)
Your CR lets you know how many people who visit your site are converted into a sale. Based on the amount of traffic driven to your site through your ad, your CR will give you a better understanding of whether your paid social is contributing to your sales, or if you need to make improvements on your checkout process or to modify your ad campaign to get more sales from the traffic it generates.
CR = Unique Purchasers ÷ Total Unique Site Visitors
Average Order Value (AOV)
Your AOV gives you the average spend on your website, which may vary depending on your industry. A higher AOV means you can spend more on paid ads to acquire a customer.
AOV = Total Revenue ÷ Orders
Should you pay attention to Facebook cost benchmarks?
These benchmarks are generalized per industry/vertical and may only be useful for tracking trends within your industry. Comparing your numbers to Facebook’s cost benchmarks may not always be helpful, especially when the data covers a relatively big industry. If you must use a benchmark for comparison, make sure to find data that’s unique to your brand.
Facebook Ad auction: How does it work?
Publishing an ad on Facebook does not automatically guarantee that you’ll get your desired results. All published ads on Facebook compete for ad space, i.e., visibility to their target audience.
There are cases wherein a target person falls under multiple target audiences; for example, a woman who likes yoga and resides in LA fits the target audience of one advertiser for yoga and another advertiser that targets women in LA. Facebook determines which ad will be shown to the woman through an automated ad auction.
Facebook uses the following factors to determine who wins in an ad auction:
This is the amount that an advertiser is willing to pay to achieve their desired result. Unlike a traditional auction, Facebook doesn’t pick the highest bidder as the “winner.” Facebook prioritizes high-quality content over ad spend to ensure the best feed experience for its users.
Estimated Action Rates
The term refers to Facebook’s calculated assumption of a person’s response to an ad, i.e., the likelihood of a person performing the advertiser’s desired action if they’re shown the ad. Determining estimated action rates is based on:
- Historical ad performance
- Post link clicks, or when someone clicks a link within the ad that leads them to a follow-up experience or destination on or off Facebook.
- The previous actions taken by a target user towards the same ad or similar ads, and whether or not these actions fall within your specified ad objectives.
Users’ interests determine what ads are shown on their respective feeds; this means that ad relevance and performance are dependent on user preferences and behaviors. Facebook measures ad quality based on “feedback from people viewing or hiding the ad and assessments of low-quality attributes in the ad, such as withholding information, sensationalised language and engagement bait.”
To “win” in an auction, your ad must be relevant to your target audience, as determined by Facebook. According to the social media giant’s ad auction information:
“For each ad impression, our ad auction system selects the best ads to run based on the ads’ maximum bids and ad performance. All ads on Facebook compete against each other in this process, and the ads that our system determines are most likely to be successful will win the auction.”
How to choose the most suitable Facebook ad budget for your campaign
When you’re choosing a Facebook ad budget, you will make a bid which will represent how much you’re able or willing to pay to achieve a specific result. Once you’ve decided on a bid, you will identify your bid strategy to let Facebook know how to spend your budget.
This indicates how much you’re willing to spend per day for a campaign. Your AOV will factor into how much your daily budget should be; however, if you have varied AOVs for different products, the best strategy is to allot different daily budgets to set up different campaigns based on SKU categories with similar AOVs or on individual SKUs.
With the lifetime budget, you’ll select a campaign duration and set an amount to spend over the campaign’s lifetime. Facebook will spread the amount as evenly as possible throughout the specified campaign duration.
If Facebook’s algorithm identifies more opportunities on certain days, Facebook may allot more of your budget for you campaign on these days and less on the other days to make sure you will stay exactly within your lifetime budget.
How to Choose the Right Bid Strategy
The right bid strategy will help you control how much you spend based on cost per action (CPA, which is similar to CPC). CPA allows you to pay only for the desired action (which you specify) a person takes in response to your ad. This means you can control how much you spend for specific actions, such as only for link clicks instead of for impressions. There are four types of strategies to choose from.
Lowest Cost Strategy
This bid strategy is fully automated, which means you have no control over how Facebook spends your budget. With this approach, Facebook aims to get the most results possible with your budget. This is a good choice for new businesses that have zero historical data and/or are still learning the ropes and are prioritizing volume results over profitability from their campaign.
Bid Cap Strategy
This strategy allows you to control how Facebook spends your budget according to your performance targets, maximizing profitability. If Facebook’s algorithm determines that it can’t acquire a target customer, it won’t spend your money to target that customer. The ideal bid cap is 30% above your target CPA.
Cost Cap Strategy
This strategy maximizes cost efficiency by enabling you to set the maximum CPA you’re willing to pay to get the most results. If your cost cap is $25, for example, Facebook will only spend your budget when it finds customers at or below your target CPA.
Target Cost Strategy
With this bid strategy, you set a target cost based on your optimization for ad delivery, and Facebook will spend within 10% above or below the amount you specify. With a target cost of $25 for a customer, for example, Facebook will make a bid between $27.50 and $22.50 to target a customer. This strategy allows you to maintain a stable cost per optimization event while your ad spend increases.
How does Facebook determine ad cost?
Winning ads are charged the minimum amount that’s required to win the auction — which means you may not be charged your maximum bid. Facebook takes into consideration several factors to determine ad costs (how much you’ll have to pay when you win the auction).
Facebook also follows the laws of economics; if the competition among advertisers is high, such as during peak seasons (Black Friday, Cyber Monday, the holiday season, etc.), ad costs also increase. This is why CPMs on Facebook cost more during peak shopping seasons.
You have two options when bidding. You can choose automatic bid to allow Facebook to decide the bid amount; or you can opt for manual bid so you can set the bid amount based on how much you’re willing to spend.
Ad Quality and Relevance
Facebook determines your ad’s performance based on your specified ad objectives, such number of impressions or number of link clicks, as well as on any feedbacks reported by users when they see and “respond” to your ad (i.e., if they choose to hide it and why).
Ad costs are typically higher the more specific your targeted audience niche is and/or the more advertisers that also want to reach them are.
Automatic ad placement, which shows ads on Instagram and the Audience Network, reaches a bigger audience and costs lower than the manual placement option.
For the latter, you can edit placements to exclude certain placements, e.g., to limit your placements to mobile or desktop, or to turn off placements for Facebook, Instagram, Messenger, Audience Network, Facebook Marketplace, or Facebook Live Streams of pre-selected and approved gaming partners.
Optimization of Ad Delivery
You can optimize your ad to help Facebook understand your campaign’s goals — what your anticipated results are and who should see your ads. Facebook’s algorithm will determine which users will be most likely to take the desired actions you specified.
The best optimization option is for purchase conversions. Optimize your ad for conversions instead of impressions or clicks so that Facebook will deliver your ad to people who have the highest likelihood of purchasing. Your CPM and CPC will be higher, but so will your ROAs for that particular ad campaign and target audience.
What is Campaign Budget Optimization (CBO)?
When you create an ad campaign on Facebook, you will typically create at least two ad sets (creating just one ad set is also an option but not ideal) using Facebook’s targeting options. Each ad set will have different targeting, scheduling, and budgeting options.
Campaign budget optimization (CBO) allows you to set a central campaign budget which Facebook automatically manages across your ad sets and in real time to capture the best opportunities for your campaign and to deliver the best results.
With CBO, you can track and optimize your overall ad spend for the entire duration of your campaign.
How does it work?
- Set an overall budget for your campaign.
- Ad sets with the best opportunities will be allotted a bigger portion of the budget amount; underperforming ad sets will get a smaller portion.
- The budget amount can be applied daily (daily budget) or spread out across the campaign’s duration (lifetime budget).
- For a lifetime budget with ads that run on a schedule, CBO makes the appropriate allocation adjustments for the different start and end times of your ad sets.
Using CBO involves analysing results at the campaign level — looking at the bigger picture — instead of analysing results at each ad set level. This way, CBO will spend your budget according to the comparative performance of your ad sets; if one ad set will deliver the overall best results, CBO will spend a greater percentage of your budget on it.
When should you use CBO?
- If you want a flexible and automated campaign budget spending for your ad sets, based on which ad set/s will perform well.
- For real-time budget spending adjustments in order to capture the most results and deliver the lowest cost per result.
- To simplify your campaign setup and minimize manual budget management.
Common CBO Mistakes to Avoid
1. Having too many ad sets
Each ad set contains individual ads; the more ad sets you have, the more ads will have to be analyzed to effectively evaluate each ad set’s performance against the others. This means that the more variables you have within your campaign, the more money and time it will cost you to analyze your data in order to optimize your budget spending.
Here’s an example calculation to determine how long it will take you to get actionable information for budget optimization:
Using the formula:
Daily campaign budget: $250
Number of ad sets: 5
Number of ads per ad set: 6
(Number of ad sets x Number of ads per set) x AOV / Daily budget = Number of days to get actionable information
[(5 x 6) x $200] / $250 = 24 days
The fix: Reduce the number of ad sets for a shorter evaluation period and faster optimization.
2. Setting your budget cap too high
Bid caps were set according to CPA targets before CBO existed.
If Facebook is unable to find customers that will purchase using the ad creative you have and at your CPA target, your CBO will not spend your budget. You may be tempted to set your cap (cost cap, bid cap, or target cost) higher or to change your target audience. Doing so will deliver customers who are above your target CPA, which will compromise profitability and limit your ability to scale.
The fix: Don’t be too quick to make adjustments to your CBO and budget caps. Wait a few days and if they’re still not being spent, optimize your ad creative and copy first. If this does not work, then you can increase your caps.
3. Making shortsighted adjustments
Once your CBO is set, you should give your campaign adequate time to deliver sufficient data before you can properly analyze its overall performance.
If you compare two ad sets too early (with only a few days’ worth of data), for example, you may be tempted to kill the ad set with a high CPA. This would be a common mistake in shortsightedness.
A bad initial performance does not usually require any immediate changes to your campaign. Remember that Facebook uses far advanced algorithms to exhaustively analyze huge amounts of data — data that are not readily available to us — in order to predict future trends and performance.
When your CBO shifts a bigger portion of your budget, 90% for example, to one ad set, it’s because Facebook’s algorithm has recognized that it will likely perform better, based on its analysis of indicators of future trends.
If you’re keen on analyzing performance data yourself, collect more than 14 days’ worth of data to get a more accurate measure of performance. And again, if you must make any changes to your campaign because you’re not getting the results you want, always start with your ad creative as this is the only variable that you have complete control over.
The fix: Let Facebook’s algorithms do what they do best, which is to make sophisticated calculations and predictions in order to effectively optimize your budget.
Optimizing your Facebook ad budget for profitability
When you set your Facebook ad budgets, your end goal should be maintaining profitability. Here’s a quick guide:
- Define your success metric.
- Determine the specific amount you can spend on your Facebook ad.
- Figure out how much your ROAS should be to maintain profitability.
- Select the best bid strategy that will help you control your cost per action (CPA) and depending on your cost control preference and your targets.
- Trust Facebook’s machine-learning algorithms to do their jobs. If you need to make changes, focus your efforts on the human side of your ad campaign, which is your ad creative.