You’re ready to jump into Facebook advertising and test out the waters, however you haven’t figured out how much you want to spend yet. Also, you don’t know the most effective way of optimizing your ads. All you know is that you want to try it out and see if Facebook advertising will work for you. So what’s the best way for creating your Facebook advertising budget? That’s exactly what you’re about to learn.
How To Determine The Value Of A Lead Or New Customer
Before budgeting the amount you are willing to spend on Facebook ads, you first need to determine the value of a new lead. That lead could be in the form of a Facebook fan, an email address, or a new customer. Whatever it is, we’re not going to spend all of our money without having some idea of how much value we’re generating. For each type of organization, that value is measured in different ways.
In large organizations, and often with large ad campaigns, key performance indicators (KPIs) are frequently used to use as benchmarks for measuring performance. While it’s not easy to track the conversion of a branded ad campaign into new sales, organizations will develop targets such as “Increase the awareness of upcoming product X by 40 percent”. There then needs to be a way to measure this.
While there are a number of tools in this space, Facebook has attempted to accomplish this through a partnership with Nielsen for a product called “Brand Lift” (first described here). The product essentially polls users before and after being exposed to an advertisement to see how effective those ads were at building awareness of a product.
For smaller businesses, increasing the bottom line is typically the primary goal. For example, a dentist will want more clients, and isn’t really as interested in building engagement around his or her Facebook Page. As such, a Facebook advertising campaign will be aimed at driving new customer leads. Those leads could come through emails or phone calls, depending on the needs of the dentist.
Similarly, a small online business which sells subscriptions to a service, will spend as much as possible to generate new customers. In fact, an online subscription service should be willing to pay up to the average life time value of a new subscriber.
Life Time Value Of The Customer
Ultimately, whether it’s the dentist or a company generating a subscriber, each customer has a projected “life time value”. Any business should be able to determine the approximate value of that customer and be willing to, at a minimum, spend up to the life time value of one customer just to test an advertising campaign. For those finance buffs out there, we would actually want to calculate the present value (see definition) of the life time value of the customer.
If the cost of a new customer ever exceeds the present lifetime value of a customer, we are by definition, losing money on our advertising expenditure.
While I’m not going to take the time to describe how to calculate the value of a fan right now (that will come in a later guide), given that so many people are investing in ad campaigns on a cost per fan basis, we thought this area deserved some attention. Investing in Facebook fans should take places after you’ve exhausted all of your direct advertising channels. This should be common sense, however the reasons is that Facebook fans do not generate immediate revenue.
However if you’ve exhausted those channels and want to build engagement and “awareness” around your brand, it’s necessary to come up with an amount that you are willing to spend on each fan, based on an expected value of each new fan. As I mentioned earlier though, this subject requires an article of its own, so we will discuss it there! (Make sure to subscribe to our Facebook marketing weekly newsletter to be updated about these articles.).
The Most Important Rule
Now that we’ve gone through some of the metrics for calculating the value of a new lead or customer, we need to figure out how much we are going to allocate to an advertising campaign. The single most common mistake that I see however, is that companies either aren’t willing to spend enough to experiment, or that they don’t test the performance of multiple versions of their ads in order to reduce the cost and increase the effectiveness of their campaigns.
Don’t be one of those companies!! Instead, consider a traditional break even analysis of a business. In any new business, it is expected that the company will lose money for the first few months (or even the first few years) as they grow the company to scale. The same theory applies to new Facebook advertising campaigns. Your new ad campaigns may not be profitable immediately.
However after extensive testing, all ad campaigns should be profitable (otherwise it’s not really helping you … right)? As I explained earlier, “profitable” is a relative term here, as every company has a different way of measuring a campaign’s success. All campaigns should all eventually become successful though. The only question that a company needs to answer is: how much can they spend until they expect every dollar in to the campaign to generate at least a dollar of value out of the campaign?
The answer differs from company to company. Clearly, a large Fortune 500 brand will be able to invest much more to see how effective Facebook performs as an advertising channel. A small business, which only generates a few hundred thousand dollars a year, probably won’t want to invest as much money. While there isn’t always an exact answer to this, as long as there is someone running the Facebook advertising, it should be expected that the campaign will eventually become profitable.
As such, businesses must be willing to invest in the early losses of a campaign, in order to get to the point where it will eventually become profitable. Each campaign has its own amount, however when I hear that a business is willing to spend $30 to test out advertising on Facebook (we’ve received multiple inquiries from people mentioning numbers that are as low as this), it’s clear that they don’t understand the basic procedure for developing a new Facebook advertising campaign.
Facebook advertising requires continuous improvement. If the cost per lead does not either decrease or immediately produce a net positive, the current strategy being implemented is ineffective.