[Inverted Passion] Notes on how Facebook ads work

Notes on how Facebook ads work

I was studying Facebook ads system for Nintee, made some notes that you might find useful.

• Facebook ads work through auction: each ad opportunity has an auction, the winner of which is decided by total value, which is
  • Total value = bid amount ($) * estimated action rate + ad quality
• So in this case, your ad will be shown to more people if
  • You have a higher bid
  • Or, more people are likely to take action that you care about
  • Or, the quality of ad is high (not spammy etc)

• Bidding is mostly automatic by Facebook, and the way it does for maximizing results is that it starts with low bids but then gradually increases it ads don’t end up winning the auction (i.e. has lower total value)
  • Interestingly, Facebook significantly cares about advertiser returns. They believe that if advertisers get returns, they will spend more. So, they don’t optimize for short term returns but ROI for advertisers.
• Let’s say you have two products: a) highly attractive cake (low cost and super yummy) and b) broccoli, and both are competing for the auction
  • If the objective is to find the highest volume for a given total cost (let’s say Rs 1000)
    • FB will start with low bids for both, and since more people are likely to click on the cake ad, its estimated action rate will go up and for the same bid, it will end up winning the auction
    • The only way for the broccoli ad to win an action is to increase the bid
    • So given a fixed budget Rs 1000, the cost per click of broccoli ad will be much higher than for cake (purely because more people are interested in cake v/s broccoli)
• This is why running ads for a concept before building it could give an honest signal of its attractiveness
  • Since Facebook always tries to give maximum value to advertiser and the most relevant ads to its users, you can imagine it as a matchmaking machine that minimizes the cost it takes for advertisers to reach a relevant audience
  • So, a low cost per action from FB ads tells you clearly that a significant number of people are going to find it attractive
• A good analogy to understand all this is to think about is a game:
  • Imagine you’re in a mall and there are two offers on the table from two different people for completing a task in 1 minute. Both will pay $5 to you for your time. One wants you to find a person wearing a white t shirt and another wants you to find a person wearing a shirt with a candle image on it. Which one will you choose? (The answer is obvious: the white one, as your chances of success are higher with that, so it’s the same case with cake v/s broccoli).
  • Now imagine the first person wants you to find 100 people wearing white T-shirts. Now you’d demand not just compensation for 100 minutes of work, but more, as finding incrementally a new person with a white shirt is harder, and it will take you way more than 100 minutes. (Finding a person with the same t-shirt is like finding a person with the same desire. This is why, to scale, you’d want to target many different desires that your product fulfills via different creatives, so FB can show your products to different people). The task is easier if you’re asked to find 50 people with white Tshirt and 50 with black one.

Resources

Facebook Doesn’t Make as Much Money as It Could—On Purpose

How to Save Millions With Marketability Testing

Facebook Bid Strategies

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