A Wired article in the fall did a great job explaining the economics behind Facebook’s advertising auction and how they support the platform’s goal of delivering the most relevant content possible and, in turn, providing advertisers with more value than any other digital marketplace.
Advertisers can’t game Facebook’s marketplace, but many continue to fall into the trap of focusing campaign planning around a CPM goal.
Optimization isn’t just rebudgeting toward your lowest-cost campaigns, it’s about understanding how each component of a campaign contributes to its performance, and knowing how to maximize their efficiency. Those who prioritize quality audience reach will win. Let’s take a look at what this means for your campaigns.
1) You should not “optimize” your CPM
When a partner or vendor claims they can lower your CPMs, what they are really telling you is they don’t understand how the Facebook marketplace works. CPMs for a given audience are set by marketplace conditions, which match demand with the supply of buyable impressions, even as overall competition against the audience also impacts costs. When you are buying Reach or Impressions on Facebook, your CPMs are not materially impacted by creative.
If you launch 30 pieces of creative against a given audience, with the same budget and flight for each, their CPMs will be very similar. This is because despite your different creatives, your demand for impressions is the same for each piece of creative, and the supply of impressions available from your target audience is also the same.
There is one caveat: Facebook wants to create a great experience for its users, so it’s willing to serve better (i.e., more relevant) creative at slightly lower CPMs. However, it’s important to understand that the effect this discount has on your CPM is very small relative to the impact of the marketplace competition. This could certainly change in the future, but it will be up to the platform’s learning algorithms to decide.
2) You can affect your CPM by altering your media plan
You can’t lower your CPMs through ‘optimizing’ without fundamentally altering your campaign. If you want to reduce the cost of reaching an audience, you either have to decrease your budget (decrease demand), or increase your flight (increase audience supply).
Say, for example, you want to launch a one-day campaign targeting a million people in the New York metropolitan area. Each user can receive your ad up to two times a day in his or her Newsfeed. So your audience represents two million impressions per day. If you double your flight length to two days, the inventory available to you goes from two million to four million, increasing your supply and lowering your costs. Likewise, if you double your budget, your demand would double and your costs would increase. By minimizing your spend per day against an audience, you can minimize your CPM costs.
3) You can affect your CPM by buying in different marketplaces
Within Facebook, there are many underlying marketplaces, all with very different baseline CPMs. In order of magnitude, the primary factors that determine your baseline CPM are Placement, Bid Type and Audience Segment.
The point at which these three parameters intersect largely determines your CPM. The rest is determined by your own demand.
Bid Types are essentially targeting overlays. When bidding for conversions, for example, the auction’s delivery algorithm will serve ads to users within your audience who have a history of online conversions.
4) Optimizing distribution costs requires a clear picture of relevant factors
CPMs on Facebook can vary from $0.30 to $25. SocialCode has mapped these costs back to specific inputs over many years of data. The example below shows how much each input can contribute to an advertiser’s total CPM.
As you can see, CPMs are primarily driven by bid type, ad placement, your demand for an audience and the competition against you. Creative is a comparatively small cost contributor. Because these primary cost factors are largely dictated by your business and marketing goals, and where you are seeing return, it’s unwise to deviate too far from them in a risky effort to achieve CPM efficiencies.
5) The lowest CPMs are not efficient, they are low quality
Higher-quality audiences will always command higher CPMs, so maximizing return boils down to two strategies: Spend a lot on the highest-quality audiences, sacrificing CPM efficiency for conversion rate efficiency; or spend very little on each member of low-quality audiences, sacrificing conversion rate efficiency for CPM savings.
The optimal performance occurs when your budget is distributed as efficiently as possible across audiences of different levels of quality and competition. Only then can you maximize your overall return.
6) Optimize to business goals, not CPMs
Would it make sense to launch your Back to School campaign by running ads a month early, to spread out your budget and reduce your CPM by 20 percent? Not really. Your conversion rates would suffer significantly, because your message wouldn’t be relevant.
When partners or vendors approach you about lowering your CPM, they are often implying they will optimize your campaigns toward lower-quality audiences. Such an audience minimizes your cost of distribution, but it’s very likely to minimize your ROI, too.
High CPMs often mean mean high-quality audiences. Advertisers should take care not to let secondary KPIs detract from their ultimate goal: ROI.
James Donner is director of ad insights at SocialCode.