Should I pay for ad impressions or clicks on Facebook?
We recently promoted a new product using Facebook Ads and had to decide between paying for impressions or clicks. Facebook ads have notoriously low click-through rates (CTR) with high costs per click, so I derived a strategy for choosing between CPM or CPC to optimise our ROI.
Choosing between CPM or CPC depends on your marketing goals. If you are building a brand, then you want viewers to see and remember your brand and you may not be as concerned with getting clicks. On the other hand, if you are trying to sell a product, then you may be more concerned with a high click-through ratio.
In order to minimise the cost of your campaign, we factor in:
- the value of a click,
- your ad's click-through ratio (CTR),
- the value of an ad impression and
- competing ad bids
Step 1. Calculate the value of a click
- Click Value = Average Sale Profit × Conversion Ratio
where the Conversion Ratio = Number of Sales ÷ Number of Visitors.
- Example: If a sale is worth $100 on average and 2 out of every 100 visitors complete a sale, then your conversion ratio is 2 ÷ 100 = 2%. Therefore, the value of a single click is $100 × 2% = $2.00.
This is your maximum CPC bid or how much you should be willing to pay for every click in order to "break-even", but since each sale has the hidden value of a potential future customer, each click is actually worth more.
Step 2. Find your ad's CTR (Click-through Ratio)
- Click-through Ratio = Number of Clicks ÷ Number of Impressions
An ad's CTR is dynamic, varying by demographic, ad copy and even time of day. But after several thousand impressions, you will start to notice a trend. Test your ad copy on your target demographic to determine an average CTR.
- Example: If your ad is shown 750k times and gets 250 clicks, then your CTR = 250 ÷ 750,000 = 0.033%, which is low, but average for a wide demographic on Facebook.
From our calculation in step 1, we know that 250 clicks are worth at least 250 × $2.00 = $500, from which we can now calculate your maximum CPM bid.
Step 3. Calculate the value of 1000 impressions
The maximum CPM bid can be calculated using your ad's click value and CTR:
- Maximum CPM Bid = Click Value × Click-through Ratio × 1000
where × 1000 is for 1k impressions.
- Example: We valued a click at $2 in step 1 and calculated the ad's CTR as 0.033% in step 2. Hence, Maximum CPM Bid = $2 × 0.033% × 1000 = $0.67.
CPM or CPC?
From our calculations, it follows that you should pay no more than $2 per click (your maximum CPC bid) and no more than $0.67 per 1k impressions (your maximum CPM bid). Your option may be limited by your competitors' bids, which are used to determine Facebook's "suggested bid range". If your maximum bid falls too far below the suggested bid range, your ads will never be seen and your choice must default to the remaining option. Your bid can be under the suggested bid, but the likelihood that your ad will be seen is significantly lowered.
The most economical method is the one which offers the most savings on your maximum bid and will deliver a better ROI.
- Example: Rather bid $1.25 per click (CPC) and save $0.75 than bid $0.50 on 1k impressions (CPM) and save only $0.16. For a given CTR, it will be more economical over the same period of time.
How to derive the CPM bid formula (more involved)
- Calculate the value of 1k Impressions = Total Profit ÷ Number of Impressions × 1000
where Total Profit is the revenue those impressions will lead to in terms of the CTR.
- Example: Since 750k impressions should lead to 250 clicks, we can estimate the value of these impressions at $500 ÷ 750k = $0.67 per 1k impressions. This is our maximum CPM bid.
- Our Maximum CPM Bid = Total Profit ÷ Impressions
- Total Profit ($500) = Click Value ($2) × Clicks (250)
- Since CTR (0.033%) = Clicks (250) ÷ Impressions (750k), it follows that: Clicks = CTR × Impressions (× Impressions on both sides)
- Substituting into 1., we derive that Total Profit = Click Value × CTR × Impressions
- And finally, we know the value of 1k Impressions = Total Profit ÷ Impressions × 1000, hence
- Maximum CPM Bid = (Click Value × CTR × Impressions) ÷ Impressions
- Therefore Maximum CPM Bid = Click Value × CTR