Are You Making This Huge Mistake When Running Facebook Ads?

März 6, 2021

You can't expect your ads to be profitable if you don't understand this.

Facebook analytics can get more overwhelming than trying to mediate a dispute between the wife and the mother.

It's easy to get lost... lose sight of what's really important or get so confused that one stops looking at the metrics all together and relies on "gut feeling analytics".

And that's where we usually go wrong. Running ads without knowing exactly if they are or aren't profitable is the biggest mistake we can do. That's where we waste our money. We need to be able to quickly assess if a campaign is doing well, and if not, where exactly the problem is in the funnel so we can fix it.

The good news is: it's actually quite easy, once you know how to do that. You only need to know two things you will find out about here today... and you'll be able to run profitable campaigns - guaranteed.

So, what are these two things we need to know about?

  1. 4th-Grade Math
    Yeah, that's right. We need to brush up on those old-school math skills... don't worry, if I can do it - you can!
  2. The Key Performance Indicators (KPIs)
    The hardest job here is to differentiate between those metrics that really matter for making informed decisions and those useless "vanity" metrics.

Okay, now that you know that I got a pretty decent gif-game, let's take a closer look at the various metrics first, and then I'll show you how to use them for your specific business to be able to iterate your numbers and make campaigns profitable for you.
We can divide the KPIs into three sections:

  • Ad Optimization Metrics
  • Funnel Optimization Metrics
  • Profitability Metrics
Ad Optimization Metrics

There are only three ad optimization metrics we care about. The first is CPC, which stands for "cost per click".

What CPC shows you is how much you have spent for each click that you've received on an ad that sent the person to our landing page.

Next, we have the CTR (click-through rate), which shows the percentage of people that have seen the ad and then actually clicked to go to our landing page.

The CPC and the CTR help us understand how well the ad itself is doing and what we need to tweak in order for it to perform better.

We can add a third metric to the ad optimization metrics - the CPL (cost per lead). This one's only relevant if you're running lead gen ads though. If you're running direct to sales ads, you don't have to even worry about CPL.

The CPL is basically a function of the CPC and the CTR to the landing page. As such, you can't change it directly... if you need to get a higher CPL you have to find a way to bring your CPC down or your CTR up.

Makes sense? No? Then read the last paragraph again, more slowly.

Got it? Good!

Onwards.

Funnel Optimization Metrics

Once people have clicked through to your landing page or your sales page, our two funnel optimization metrics come into play - the conversion rate on your landing page, and the conversion rate on your sales page.

These basically tell you how well your funnel is doing and how to tweak it for it to perform better. This is all you need to remember for now. It will become more clear later once we go through an example.

Profitability Metrics

What remains are our two main profitability metrics - the CPA (cost per acquisition) and the AOV (average order value).

You need these metrics if you're planning to take pictures like this one:

The CPA tells you how much you have to spend to generate a new customer or client. It doesn't matter how much or how often they buy from you. It's just about acquiring a new customer who buys SOMETHING from you.

The final abbreviation for today - I promise - is the AOV (average order value). The AOV tells you how much each customer spends with you on average for each transaction. So let's say you got 50 customers, and you've made $10,000, that would mean that your AOV is (10,000:50 = 200 AOV).

So far so good. But how does this knowledge help you actually run profitable ads?

With an easy formula.

All you need to do is to make sure that:

CPA < AOV

That's it. That's it? That's it!

The money you spend on acquiring a new customer needs to be less than your average order value.

I know... easier said than done, right? But hang on... I'll show you how to do this in a moment.

Here's an example

Let's say you're running an e-commerce store with the most simple imaginable funnel: A Facebook ad sending traffic to your sales page or rather product page... and then the buyers will be sent to a thank you page. No upsells. No downsells. No followups. Simple.

In order to make this work, we would need to know certain numbers that you may or you may not know about your business.

For this example (and in case you're just starting out and don't know these numbers for your store) we will use conservative benchmarks.

For that, we'll assume a 1% conversion rate of people visiting your product page into buyers. Again, this is just a benchmark and may vary depending on the attractiveness of your offer, the quality of your ad and targeting, and the level of optimization of your product page, amongst other factors.

Still, it's a good conservative number for us to work with.

So we have a 1% conversion rate on the product page. Let's say the product is selling for $50. We don't have any upsells, downsells, order bumps - just the main offer.

This means, our AVO is at $50. In order to have our profitability 1:2 ratio on return on ad spend, our CPA could be a maximum of $25. However, we have to subtract the cost of goods (COGS) as well. In this example, let's say that's $10 to produce the product. So $25 - $10 would leave us with a CPA of $15.

Onwards.

The benchmark for our CTR is 3%. That's a good number to have usually. What's left is to determine our CPC.

We already know that we have a 1% conversion rate on the product page, which means that 1 out of 100 clicks is going to convert into a buyer. So if we want to keep our CPA at $15 we would have to divide $15 by 100 (clicks) = $0,15 per click.

Now that's a doable CPC... but not always easy to get.

One way of being able to pay more per click while keeping the CPA goal of $15 intact would be to increase the conversion rate of the product page.

For instance, if you could optimize your product page, your ad, or your targeting and thereby get the product page to convert 5% of the traffic you could now pay up to $0,75 per click and still get a CPA of $15 which would leave you a $25 profit per sale.

You can affect that conversion rate by improving the design, your copy, or adding more value to your offer. That's the beautiful part. Once you know your numbers, you will know what to tweak to get better results. And sometimes it's just a little improvement on each of your funnel steps that leads to a big win!

So much for the e-com example. Now let's look at another example of a lead generation campaign.

Example 2: Lead Gen

In this example, we're shooting for a 3% CTR again. The opt-in page converts at 25%, which is a good benchmark to have (20-25%), even though opt-in pages with a lot lower conversion rates could still be profitable, depending on other factors.

After opting-in the leads are sent to a webinar, which converts at 1.39%.

What would a profitable CPL be here?

Let's say we want to get 100 new clients. What we would have to do is to divide 100 by 1,39% (our conversion rate on the webinar) = 71,94. Thus, for 100 new clients, we would need 7194 leads.

Now if we want our CPA to be lower or equal to $700 and we also want 100 new clients...

We have to take $700 x 100 = $70,000. This means that we can't spend more than $70,000 to generate 100 clients or 7194 leads.

Next, we divide $70,000 by the number of leads, 7194, and end up with a CPL that has to be less or equal to $9,73 in order to get a CPA of $700 and still have a 1:2 return on ad spend.

Are you still with me here? Good. Now we have been throwing all those numbers around like pillows at a pajama party and still don't know what our target CPC would have to be though.

For that, we need some more math... who's excited??? I knew you'd be. Okay, let's take a look.

In this example, the opt-in page is converting 25% of the clicks into leads. So if we take the 7194 leads and divide it by 0,25 (25%) that would be 28,776 clicks to make this CPA work.

And we still can't pay more than $70,000 on these 28,776 clicks, so we would need the maximum CPC to be at $2,43.

There it is.

You now know what your key performance indicators or KPIs are that you need to watch and tweak in order to run profitable Facebook ads for your business.

Before you start running any Facebook ad campaign... do this calculation first and you'll have clarity on how much exactly you can spend for those clicks and...

Where your funnel may be missing benchmarks.

Now go crush it.

Talk soon,

Hamoon Green

P.S.: If you need help with this or want me to audit your Facebook ad campaigns or the rest of your funnel, I'm just a click away. And that click is for free.

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