There is a spider called Huntsman. It lives under the sand in the desert and emerges only at night.
The Huntsman spider has a unique property.
It stands completely still in the dark, uses its 8 eyes and concentrates—to mentally draw a map of the landscape so that it can navigate around it in the dark.
But what does that have to do with Facebook DPA?
This post will give you the tools to take a step back, get an overview of the marketing landscape, and understand where to go if you want to be more successful.
You’ll probably get a somewhat different data-driven perspective on your Facebook advertising than you are used to—even compared to our previous posts.
Often, even experts who are far more skilled than us at Facebook advertising get food for thought when things are broken down mathematically to this degree.
But fret not—when even we can understand it, everyone can.
The Secret Behind Facebook Advertising
If you start with these 4 metrics, then the math can get you to the finish line:
- PPC (pay per click)
- CTR (click through rate)
- ROAS (return on ad spend)
With them we can calculate the 5 other interesting metrics ourselves:
- CPM (cost per mile)
- Ad spend
- EPC (earning per click)
The formulas below show you how to calculate several of these metrics back and forth.
In other words, you often only need to use 2–3 advertising-related metrics in order to quickly calculate the others.
You do not need this very often, but (!) it is healthy to reflect on how these key figures are actually connected— mathematically speaking.
Your Success on Facebook Depends on How Well You Manipulate These 3 Things
Look, now it got interesting.
We can calculate the return on our Facebook advertising using CTR, EPC, and CPM alone—as seen by the formula below.
We can translate this into three things you can work on to create a more profitable return on your advertising dollars: Your ROAS is therefore a product of your CTR, EPC, and CPM.
How do you turn on those buttons? Where to do it? And what to expect?
- Good CTR = Effective Ad—It’s hard to say exactly what drives the majority of clicks on an ad, but it’s a combination of a relevant ad with an eye-catching design at the right time for the right audience.
- Good EPC = Effective combination of the target group, product, and a strong website. To get a high EPC, you must have a well-functioning website and you must make sure to get clicks from Facebook with high relevance and quality – i.e. target the right people.
- Good CPM = Cheap Advertising. The price you pay to run your ad depends on supply and demand on Facebook as an ad marketplace. Your biggest opportunity to influence your CPM is partly timing and advertising relevance.
Dynamic product ads (DPA) can be a powerful tool in this context as several experiments have shown that dynamic product ads can help to improve all three metrics—however mainly CTR and CPM.
Finally, of course, it’s about achieving a good ROAS.
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Prove the Effect of Your Best Product Ads
It’s not clear how much improvement in your advertising budget you will experience by going from traditional to dynamic product ads, but it is not unrealistic to expect an 8–18% increase in CTR.
The increase in CTR is a consequence of better and more relevant ads, which often also gives a better score for ad relevance on Facebook.
Therefore, it is also not immediately that CPM drops by between 6 and 10% if you succeed in producing interesting and current product ads.
What is this worth to your business?
It depends on a few other factors, but below is an example of the calculation (we assume that CTR increases by 14% and that CPM decreases by 8%)
In this example, our ROAS will increase from 8 to 9.91 as a consequence of our CTR improving 14% while our CPM decreases by 8%.
This is obviously a nice, delicious improvement.
CPM> CTR: As the formula shows, we can also deduce that a 20% reduction in CPM will have a greater effect on our ROAS than a 20% improvement in CTR, which is interesting. Therefore, we should not underestimate that advertising relevance is at least as important as the “impact” of the ad.
It is unknown exactly how ad relevance is calculated, but CTR is probably quite strongly correlated with that metric. Therefore, among other things, you can optimize your CPM by optimizing your CTR—but do consider whether there are other ways you can make your ads exciting to the user without necessarily driving clicks. This might lead to a lower CPM.
Maximize Revenue or Get the Same Effect for Less—What do You Want?
ROAS is only an expression of efficiency and not effect.
Moreover, whenever possible, efforts should be made to optimize economic key figures and not channel-specific metrics, which is why we need to translate this ROAS improvement into a monetary value.
You encounter a choice here: Do you want a) to make your spend more efficient or b) to get maximum effect from your spend?
In other words, understand the economics of your business: ROAS is the same independent. You get the biggest difference between Ad Spend and Revenue by using the same budget with greater effect—see example:
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On the other hand, it is not always about turnover but also about actually making money (read: profit).
Think about it: Is there an optimal ad spend, a “minimize” and “maximize,” when it comes to profit?
Assuming a flat profit margin, businesses with a positive ROI on their advertising make the most money by spending as much money as possible, mathematically speaking.
The challenge, however, is that there is this mischievous term called ‘Diminishing returns,’ which means that the last advertising dollar is always worse spent than the first.
Therefore, like any other skilled marketer, you should experiment with the optimal ad spend for your business.