3 Factors that Determine CPA
There’s one big question we always get asked by new clients before we start running campaigns: how much is this going to cost?
It doesn’t matter whether an agency like Abacus is running ads or the client is creating the campaigns on their own; everyone is concerned if Facebook Ads fit into their budget and if they’re actually worth the cost. Even if we know what the general cost is, we still want to know how we can drive the cost down more.
The answer is sometimes complicated: the cost of your campaigns is dictated by a number of different factors that can be difficult to track. Some of these are out of our control, like the audience we need to target or the time of year we need to run our ads.
There are three factors, however, that most directly affect your cost per acquisition (CPA); they all connect to each other and weigh heavily on how much you’ll pay for the results you’re optimizing for. Here at Abacus, we call these factors The Facebook Ads Triangle. This post is going to take a look at each point on the Triangle and discuss how it can be used to understand the cost of your Facebook Ads—and lower them.
Your CPA is your Cost Per Acquisition, which is the cost of the results you’re optimizing for. This metric will tell you exactly how much you’re paying for each new click, lead, video view, or sale you’re getting. It will essentially determine how much you’re paying for your ads. This is a significant number, and it will directly affect the success of your campaigns—and your business.
For a real, concrete example of why this is so important, consider this: companies that are able to acquire customers for less than a third of their average lifetime profit can grow and scale extremely quickly. That’s an expense that is easily affordable and gives businesses more budget to continue to bring in new leads and customers.
At Abacus, we use this as our key rule of thumb and work to keep costs under this mark. By understanding these numbers, we’re able to get familiar with our clients’ businesses and revenue drivers quickly, which strengthens their campaigns and results in more success.
Facebook Ads gives advertisers the rare opportunity to track user behavior from ad impressions all the way to digital conversions (and now, offline conversions). This allows you to calculate an accurate CPA and optimize it in perpetuity. This is valuable insight that we make diligent use of at Abacus.
The cost of your ad campaigns can vary vastly depending on so many factors, including how much your competition is willing to pay. This is just part of how a bidding system works; whoever is willing to pay the most is more likely to get their ad placed, and can drive up costs for everyone else. This means that advertising during busier times of the year will cost more.
There are, however, three factors that affect each other and CPA most directly. These factors make up our Facebook Ads Triangle and are your CTR, CPC, and Relevance Score, all of which are trackable through the Ads manager.
Your click-through rate (CTR) tells us how many link clicks your ad received, divided by the total number of impressions the ad got.
CTR is an essential metric both for our own knowledge and for CPA. We need to know that users are clicking because that’s the desired action we need them to take. It lets us know that our ads are actually effective and relevant. Your CTR is an incredible measure of how your ad resonates with a specific audience and should be a heavy focus when you’re split testing. Your audience has to be interested if they’re going to click, after all.
CTR also gives us valuable information about the rest of the sales funnel; if our ad gets a ton of clicks, for example, but they all drop off at the landing page, we know something isn’t quite adding up; maybe our targeting for the ad wasn’t quite right, or it was misleading, or our landing page is weak and not optimized for conversions.
On top of this, your CTR will directly impact your CPA. Just as businesses use CTR to evaluate success and relevance of an ad, Facebook does, too. Ads with high CTRs are deemed more relevant and are given a higher priority in the bidding system. This can effectively lower your CPA.
Fun fact: On carousel ads, you’ll be able to see the CTR of each individual slide so you’ll know what’s most effective and exactly where your traffic is going.
CTR can decline extremely quickly, even if you had a high performing ad just a few days ago. This potential decline is most directly tied to frequency, which tells you how many times the same user is seeing the same ad. A frequency of 2 is ok, but anything much higher means you’ll likely see a drop-off in CTR—and fast.
The smaller your target audience is, the faster your CTR will decline; audiences of 10,000 or less can start declining in just 3 days. It’s why you should never set campaigns on autopilot; they need to be watched closely. This is one of the reasons hiring an ad agency to help you monitor and manage your campaigns is a huge perk; we take care of all the tedious monitoring for you.
If you’re new to Facebook Ads, your CTR will probably be a little lower than you expected. That’s normal.
The average CTR varies based on factors like location and what industry you’re in and can range from .04% to somewhere closer to 3%.
According to a great benchmark report from Salesforce (see the full report and all the data here), some examples of average CTRs based on industry include:
The type of ad you run also influences CTR. Examples include:
How to Improve CTR
If you want to improve CTR, there are a few strategies you can use to do so. You can choose to only use Newsfeed and Instagram placements (both mobile and desktop), as they have the highest average engagement overall. You can’t like or comment on a right column ad, after all, and both the peripheral positioning and lack of social proof could hurt your campaign.
Using highly-targeted ads designed for niches within your audience can also help improve CTR. If you’re able to identify your audience’s different pain points and appeal to them appropriately, you’ll be able to create extremely relevant and engaging ads. Using well-developed buyer personas can make this task much easier.
Always split test your campaigns. This will help you find the ads that resonate most with your audience; sometimes, you may be surprised by the ad with the strongest performance.
Your Cost Per Click (CPC) tells you what you’re paying each time a user clicks from your ad to your website or your app.
You can choose to bid for clicks, which allows you to be charged on a CPC basis, instead of bidding for impressions; in the latter, you’ll be charged for views. A counted click will only be an actual click to websites and apps; likes, shares, and comments are considered engagement and do not count.
It’s intuitive that CPC (the cost you’re paying per click) will affect the overall cost of your campaigns and your CPA. You can do a sensitivity analysis on your CPC to see how low it needs to be in order to hit your CPA goals. A CPC of $1.25 when a click is worth only $0.79, for example, would mean that you were operating at a loss.
Average CPC Performance for Facebook Ads
Like our first point on the Facebook Ads Triangle, your CPC will be influenced by plenty of factors, including how in-demand your targeted audience is and which placement you choose. If there’s a lot of competition, you can almost guarantee that your CPC will go up. This means that peak times of the year, like the holiday season, will drive up CPCs.
Some crucial CPC facts to consider include:
CPC can vary wildly and is affected by everything from your location, the size of your audience, the exact audience you’ve chosen, the type of ad you’re running, and your bidding strategy.
How to Improve CPC
All of our Facebook Ads Triangle points interact and are heavily influenced by each other. If you have a high CTR, your relevance score will increase and your CPC will decrease. That means that improving CTR and engagement on your ads is one of the most effective ways to improve your CPC, and thus your CPA.
Again, split testing your ads ahead of time will tell you not only which ads had the most clicks, but which had the lowest CPCs.
3. Relevance Score
And now we’ve arrived at the relevance score, which is largely determined by CTR and will heavily influence CPC. The relevance score is a metric Facebook gives us that tells us how relevant they perceive our ads to be, and it’s presented to us on a scale of 1-10. They use a combination of metrics like an ad’s CTR, engagement rates, and user feedback to determine your relevance score. If users share your ad, comment on it, or click on it, for example, your relevance score can go up. If they hide the ad or mark it as not relevant, your relevance score sinks.
Ads with the highest relevance scores will be given first priority in the bidding system. A good relevance score can significantly expand your reach. Facebook will even charge you less when they serve your ads if you have a higher score. A solid relevance score is not only a great metric to watch when evaluating how your audience feels about your ad, but it also directly influences CPC and CPA.
We don’t know exactly what equation Facebook uses to determine an ad’s relevance score. While Facebook gives you the number, it’s a black box metric; we see the outcome and the final number, but we don’t really know exactly how Facebook calculates the relevance score. Because of this, your relevance score must be evaluated and monitored closely. Like your CTR, it can change quickly, and it can vary greatly from ad to ad.
You’ll be able to see a relevance score on your ad once it has received 500 impressions.
Average Relevance Performance for Facebook Ads
Unlike our two other points of the Facebook Ads Triangle, knowing an “average” relevance score won’t help us much. Instead, we focus on getting each ad campaign the highest relevance score possible.
How to Improve Relevance Score
Improved CTR, more engagement, and positive feedback all contribute to your relevance score; each of these branches is important.
The best and most effective way to improve your ads’ relevance scores is to really hone in on niche audiences. Using “warm” custom audiences—including custom audiences from a website—can increase engagement and clicks since the audience is already familiar with you. Sectioning your audience off into smaller segments and then creating lookalike audiences off of them and running targeted campaigns can be one of the best ways to reach relevant cold traffic that will be interested in your ads.
CPA & ROI
Deciding how much you can afford to spend on your campaigns and on individual conversions and acquisitions is an essential part of Facebook Ads preparation. It’s ok to have a slightly higher CPA, for example, when the resulting ROI pays off.
Let’s look at an example. Let’s say your CPA for an app install is $2.49. The app costs $2.99. You are making a profit, so you’re still in the green.
But what about a CPA of $2.49 on an app that’s free and relies on monetizing through in-app purchases? Let’s say that only 30% of your users will eventually make in-app purchases (with an average of a $5.00 purchase), and your app had 100 downloads. You’ve spent $249 and made $150; you’ll lose money too quickly.
It’s easy to calculate a rough ROI when the sale is immediate and direct. It can be a little more challenging when your ads are focused on more social investments like leads or engagement. When taking these into consideration, you need to calculate the lifetime value of a customer and factor that into how much you can afford to spend on a single lead.
The Facebook Ads Triangle’s Miscellaneous Benefits
Once you’ve mastered the Facebook Ads Triangle, you’ll see a host of great benefits. Not only will your CPA be lower, but your reach will be expanded.
Focusing on these points when creating your campaigns also increases the likelihood that the ads are being shown to the right people. This means more results, and it’s a huge advantage that they come at a slightly lower cost thanks to a reduced CPA. More results for a lower cost means a significantly higher ROI, and more room to grow and scale your company.
Where Do I Start?
Now that you have all the information you need to get started, where do you actually start? This is a question that tons of businesses struggle with; since all the points intersect, how do you actually break into it?
You have to decide which side you want to hack. Which one do you want to focus on? You must have an advantage in one of them. Once you do, the rest of the Triangle’s points will fall into place, too.
Many businesses start with CTR, but this is often the hardest point to hack. Instead, focusing on your relevance score can be a more effective way to create stronger ads that cost less. By focusing on segmented audiences, buyer personas, and split testing, you’ll be able to create much more relevant ads and distribute them to an extremely targeted audience. This will increase CTR, raise your relevance score, and lower your CPC. All of this will benefit your CPA.
It’s important to note that lowering your CPA will take time; there is no magic formula to start your campaigns off at record-breaking low costs. It will start high, and with a steadfast commitment to testing, learning, and adjusting your campaigns, you can lower it, optimize your campaigns, and improve your results over time. This will never be something that you can set on autopilot; you need to update and refresh your campaigns regularly and proactively instead of hoping for repeat high results from one great ad.
The cost of your campaigns can affect your profit, the total results you get from them, and the speed at which you can increase leads and scale your company. Understanding CPA is the first step to keeping costs low and ROI high—and growing your business. By using our Facebook Ads Triangle, you’ll be able to understand and control your CPA as much as possible, and we’re ready to help you do it.
Are you ready to use Facebook Ads to generate leads and scale your company? Contact us here and let’s get started!