The true costs of Facebook advertising

Ads on Facebook are the miracle solution for many companies when it comes to digital advertising. The platform itself puts the number of monthly active Facebook users worldwide at around 2.8 billion, without taking into account other platforms of the so-called Meta advertising network, which includes Instagram and WhatsApp, among others. In recent years the ad network has come under increasing fire, from accusations of a high proportion of fake accounts to the misuse of personal data for political campaigns in the “Cambridge Analytica” scandal. The question is, are Facebook’s ads still worthwhile in 2022? How high are the costs of these advertising measures and how do I calculate my budget?

These are important questions that many businesses have to ask themselves when it comes to the digital communications policy of their brand. For this reason we have presented in this article the most important developments in digital marketing with regard to Facebook advertising, and summarised the most important key figures relating to the costs incurred.

The way the Facebook ads auction works

The cost of ads in the Meta ad network, for example on Facebook, can’t be quantified precisely. The platform follows a similar approach to many other online advertising networks. There is no offer with a fixed price for a specific service if you want to advertise on the platform. Instead, the cost of your Facebook advertising varies depending on a number of different factors.

From a technical perspective Facebook operates an auction system in which potential advertisers place bids to win the right to run their advertising campaigns. In doing so, Facebook doesn’t only award ad space according to the highest bid, but creates a balance between advertisers wishing to reach people with their message and users who would be interested in seeing that message. Behind the scenes of the social media networks, billions of auctions take place every day that determine what content is played out to users in their feed. So Facebook weighs all the competing bids for a slot, and then chooses the ad that it believes offers the best value to the user.

Campaign types and their bidding options 

In creating an ad on the Facebook ad network, the first step is to set a budget and define the goal of the campaign. Facebook gives you the option to apply some general optimisations to your campaign. Each of these will automatically optimise your campaign for a specific bidding option and goals.

The following options are the most common ways to do this:

Costs per 1000 impressions (CPM) – Your payments are dependent on the thousand impression price, regardless of whether users click on the ad or not. Facebook aims to reach the widest possible audience.
Costs per click (CPC) – You pay every time someone clicks on your ad, regardless of what they do after clicking. For this purpose the algorithm selects people it thinks are most likely to click through to your website.
Costs per action (CPA) – Facebook’s pixel records, for example, the orders in your online shop (actions), which serve as the basis for the costs of the campaign. Facebook targets your campaign to people they believe will complete the conversion you are looking for.

How to set an appropriate budget

In principle, any budget can be used on Facebook. What makes financial sense for the individual business is a different question. Here so-called ‘unit economics’, i.e. the costs that a product causes, play a decisive role. Products with a low margin often leave very little room for manoeuvre when it comes to creating profitable advertising. For this reason, it often makes sense to use the following rule of thumb to estimate the budget to be spent.

A budget calculation can be made on the basis of three factors. On the one hand, the size of the target group plays a role. As always, the more people you want to reach, the more money you need. In addition, the frequency of the ads for users is a decisive factor, because the attention span of users decreases drastically in the course of their time online, which usually means that several touchpoints are necessary for a conversion. The third factor is the CPM, i.e. the cost of reaching 1000 users. In Europe this is usually between 4 and 6 euros on average.

(Target group size * frequency) / 1000 * CPM = budget

If the selected target group consists of 367,000 people and they are to be contacted with a frequency of 1.8 and an average of 5.5 EUR has to be paid for this, the budget can be calculated as follows:

(367,000 * 1.8) / 1000 * 5.5 = 3,633 EUR

Please note! This is a guide to be regarded as a rule of thumb only, as the number of factors that determine the actual cost of advertisements makes it impossible to generalise.

Important factors that tell you whether your Facebook ads are worthwhile

Facebook ads require an overview of all costs incurred in order to check the profitability of the advertising measures. A focus on the essential factors, i.e. the key performance indicators (KPIs), is indispensable. In the ad manager a wide variety of key performance indicators and units of measurement from the tracking results are displayed, which means that the essentials are often lost from sight. For this reason the main KPIs that have an influence on the costs of an advertising measure and thus determine how useful such ads actually can be are presented below. The relationship between the various factors and how they influence each other plays an important role here.

The central factors:
CPM – Measure of the reach of and ad and is an indicator of success within the network.
CPC for outbound clicks – A unit of measurement for the cost of traffic that directs users to the website.
Conversion rate – Guide value that shows the average percentage of users who actually perform a desired action on your website.
Cost per order – Summary guide value for the average cost of a new order.
Shopping basket value – Snapshot of a customer’s financial output, i.e. the monetary value of a customer, also called customer lifetime value.

These factors and their ideal target values can be used to find initial indications of what a Facebook campaign needs to look like in order to justify its economic existence.

Placing Facebook ads means testing, testing and testing again!

In all digital marketing, as always, the proof of the pudding is in the eating! Facebook ads have become significantly more expensive now than they were a few years ago. In spite of this it isn’t too late to try it out. Every case is different and for a specific product all generalisations can quickly turn out to be invalid. Accordingly, it is important to run a test in which central KPIs, such as cost per order, are set as target values in advance so that they can be checked. A number of factors can be identified that have a direct influence on the advertising measure. These must then be analysed in the second step, so that the true costs of Facebook advertising for a specific case can be evaluated.