How the Facebook Ad Auction Works
Facebook’s auction is similar to that of Google AdWords, where value is created for advertisers by giving them the capabilities to reach target audiences and drive results.
The caveat is that the “value” derived for the advertiser must also create a relevant and positive experience for the end user. The Facebook auction is designed to balance these principles and reward the advertiser who does both the best. In a regular auction, the winner is the one with the highest bid. This is not the case with Facebook advertising.
To clarify: Every time an ad is created in Facebook and set live against a target audience, you are entering the Facebook Auction. You enter this auction with the bid that you specify within your ad set:
After choosing how your ads will enter the auction, you have two options for bidding: an automatic bid or a manual bid.
In this bidding option, Facebook places an automatic bid within each auction. The bid is calculated to spend the entirety of your specified budget while accumulating the most results for your ad. Facebook wants their users to trust the platform to achieve the most results for the best possible price. If you are still trying to gauge an “average” cost per conversion on Facebook, this may be a better option for you. However, to truly be competitive with your bidding and to ensure that you reach that next-level of quality user, manual bidding is the way to go.
As with many aspects of online advertising (and life), you can put faith into a platform that is inherently designed to take your money to make decisions for you…or you can take control of the vehicle and get to where you want to be without all of the fluff.
Manual bidding allows you to have strategic control over the delivery of your ads and could lead to better results for a lower cost than automatic bidding. The method for manual bid is slightly different depending on how you choose to optimize your delivery:
It’s more advantageous to optimize ad delivery for the result you are looking for. Facebook’s delivery system and auction optimize for the desired action within each campaign objective. For example, when optimizing for conversions, Facebook looks for individuals within the audience who are most likely to convert or commit the specified action. The only time I would suggest using the other delivery methods would be if you have a smaller audience and confidence that the audience would convert or commit the action you want.
When you are manually bidding for actions like conversions or clicks, you have two options, maximum or average:
Maximum bid allows you to set the absolute limit you are willing to pay for a result, while Average takes your bid and is able to enter the auction with the flexibility of leveraging your specified bid amount as a median, not a ceiling. Average bidding allows for greater flexibility when entering the Facebook auction due to the ability to bid slightly higher than you would with a maximum bid in order to reach “higher quality” users.
Facebook Ad Quality and Relevance
Another element of the auction is your Relevance Score, which takes into consideration the “quality” and relevance of your ad.
These factors are based on how your audience reacts to your ad. For example, if your ad receives negative feedback, that can decrease its total value. If a user is historically interested in what you’re advertising or reacts positively to your ads, those actions can increase the value of an ad. Positive feedback increases your Facebook Relevance Score.
The Truth About Relevance Score
Relevance Score estimates how well your ad is resonating with a specific audience it is being served to. The concept is unsurprisingly similar to that of Google’s Quality Score and can be equally beneficial while many times just as misleading.
Relevance score essentially gives you the ability to receive a discount within the Facebook ad auction while simultaneously extending your reach within that audience. The ability to maintain a high Relevance Score can be a crucial competitive advantage when it comes to clicks, visibility, brand awareness, brand engagement, and very top-funnel marketing metrics.
While all of these things are important to running a successful business, Relevance Score does not give you a full picture. If your goal is driving conversions, purchases, or any other form of direct response, judging your Facebook ad’s performance based on its Relevance Score would be like judging a bald eagle on how fast it can run.
You can also think of Relevance Score in terms of music. Pop music produces the equivalent of a high Relevance Score, because a large volume of people, many of which have a fleeting interest in what they are listening to, are being marketed to in the broadest way possible and receiving an overall positive experience. Alternatively, you could have the smaller niche audience who are far more invested in what they are consuming (like a cult following), and your unit of measurement in regards to success is entirely different.
Relevance Score can be an extremely effective metric to focus on when it comes to particular advertising goals, it’s just not the gold standard it is often made out to be.
Estimated Action Rates
An “estimated action rate” is a measure of how likely a person is to take the actions required to get you the result you have optimized for. For example, if you are running an ad for workout equipment that’s optimized for purchase conversions, you would most likely be targeting people interested in fitness.
However, just because someone’s interests are relevant to the ad, it doesn’t necessarily mean they are going to purchase the equipment. That’s why Facebook factors in “estimated action” rates. From the individuals within your audience, Facebook tries to find those who are most likely to commit the action you are looking for. The algorithm will essentially target people who are in the market to buy workout equipment, thus reaffirming why you should bid based on your desired result.
Strategically Using Bids, Budgets, and Creative to WIN on Facebook
Understanding how the ad auction works is the first step to competing in Facebook. The second is understanding how to strategically manipulate this knowledge to your own benefit. The relationship between your budget, bids, and use of creative is the key to victory assuming all other factors (i.e. targeting) are done sufficiently.
Facebook Budget and Bids
Creative aside, there is a direct correlation between your budget and your bid that will have a profound impact on your delivery and overall success. Whether you set a daily or lifetime budget, Facebook’s goal is to spend all of it. When you have an ad set that is NOT on track to spend its full budget (under-delivering) it is ultimately treated differently than if it was. Let’s look at the difference:
According to Facebook:
The clear codependence between bid and budget in order to maximize an ad set’s delivery is the key takeaway here.
Let’s use the example of driving leads through a website conversions campaign: Your target cost per lead is $20 and you are using a website offer to drive these conversions. You have $5,000 in total budget to spend and you’ve come to the crossroads – daily or lifetime budget? If you specify a daily budget, you essentially are telling Facebook to spend “X” amount within 24 hours. There is no way to day-part with daily budgets either, so if your decision is to use daily budgets to exhibit more control over an ad set’s spend day-to-day, you should keep in mind that your ads will be showing up around the clock regardless of any geographical mixture of targeting you could be bidding for.
Lifetime budgets on the other hand allow you to select a schedule for which to show your ads to the selected audiences. Dayparting aside there is another element to the equation that I believe is the core reason to choose lifetime over daily. When you increase your budget in an ad set it is likely that your average cost per result may increase as well. How does this happen?
If you increase your budget you have to win more auctions for Facebook to spend it. As I said before, Facebook is in this to spend all of the money you tell it to. Due to the reality that there is a finite number of auctions with the same cost per result that you may have been getting, as you increase your budget, you have to go for increasingly higher cost results.
Let’s say you have a $20 budget and a $10 bid – Facebook will lower your bid to make the most out of the small budget. If the bid is lowered to $4, you could win all of the $4 auctions and ultimately receive an average cost of $4. Conversely, if you raised your budget to $200, it’s not likely that the number of $4 auctions exist even if you won them all. It would be very unlikely that you would even come close to spending that $200 budget. Therefore you have to enter into auctions with more expensive results in order to spend the specified amount.
With this knowledge in hand, if you have a daily budget, you will enter as many auctions as your bid allows in order to reach your budget. With a Lifetime budget, however, you are allowing Facebook’s algorithm to factor in another element into the equation – pacing. If you have a lifetime budget of $5,000 vs. a daily budget of $1,000 (that you intend to run for 5 days) – the fundamental difference is you could actually tell the lifetime campaign that you are going to spend $10,000 within the same timeframe, with the intent of spending the original amount.
Be warned – if you are NOT careful or don’t monitor the progress of your ads, you could easily overspend. This tactic should be used ONLY if you are comfortable with the risks involved.
With that being said, let me explain further: In the past I have had the total budget at $1,000 but given Facebook the lifetime budget of $5,000. Within this Ad Set, I had specified what times during the day I would want my ads to be shown. Now comes the important part, the bid:
I took the “suggested bid” per result of this audience and increased it exponentially. My reason being is that I’m attempting to optimize for the conversions that I specified, which are “Content Downloads.” It’s highly unlikely that I will ever pay $150 for an individual to download our content. I do know however, how much others are willing to pay for conversions “on average.”
Facebook’s algorithm is really good but it’s no psychic and I’m well aware that the experience of visiting the landing page, the emotional appeal of the copy, and ease of committing this action are not factored into my suggested bid. My point is that you should get to a place with your creative and offer where you are extremely confident that you can outperform your competition in the auction.
Other advertisers are bidding “$22.19 – $43.61” dollars for conversions, but those “conversions” and experiences for users could vary incredibly. As I mentioned earlier, Facebook will bid lower to get you the most results within your budget. If I specify that I am willing to spend $150 per result, I am bidding with other individuals who have the potential target CPA’s of that amount.
Facebook’s algorithm is taking my $150 bid per result, my $5,000 (specified) budget, the time period within 24-hours that I intend to show my ads, and deciding on how to serve them most effectively within these parameters. What Facebook doesn’t know is that I have no intention to spend $5,000 dollars on the campaign and I’m not going to pay $150 per result….but I could…if I wanted to.
Instead, my carefully chosen, well designed, and high-converting offer was shown to an audience of individuals who not only had relevant interests and behaviors but who also had needs that the value proposition of that offer was relevant to. I was able to drive 280 content downloads and spend $985 before I paused the ad set. My final CPA was only $3.52 per content download. Facebook took my bid and budget with the specified time frame and served the ads in a way that allowed me to win the majority of the “low hanging fruit” bids within that audience for the desired cost. However, my campaign did not run the entire duration and my offer was good enough for the audience to convert at a rate so that I did not spend $150 per result.
When you have a bid and total budget, the algorithm will figure you will spend $5,000 with $150 per result (at least 33 results). When you out-perform these expectations, Facebook believes it’s driving more results than you anticipated and will try to maximize these results for a period of time. This is a fairly advanced strategy, but I believe it’s an important lesson to showcase how all of the elements that go into the Facebook ad auction play a role in the end result.
Now you probably don’t have the bandwidth for all of these tactics, especially if you’re using Facebook ads as a small business, so I’ll list out the core things you absolutely can do in order to compete in Facebook
How to Compete In Facebook Road Map
Optimize for the results you are looking for: If your goal is to drive conversions on your website, make that your goal. It will further increase your chances of success.
Choose a lifetime budget that works for you: You don’t have to do anything “hacky” with your budget the way I did. If you know what your budget is and the amount of time you want it to spend, you can make it that and still be competitive.
Know Your Promotion: Know what you have to offer and who will want it. Focus on the value proposition, creative, and copy to truly gain a competitive advantage.
Bid and budget Intelligently: Leverage what you know about the Facebook auction to bid competitively within your budget.
Creative Competitive Advantage
Aside from the vast technical capabilities it offers, what makes Facebook one of the greatest platforms for marketers today is its ability to reward quality advertising. You could know everything I have talked about in this post but if you do not know how to creatively connect with your audience, you’re going to struggle and you’re going to pay more.
If you’re going to spend money on marketing, no matter what the channel, you need to create value in order for that investment to be worthwhile. The beauty of paid channels like Facebook ads and Google AdWords is that if you have the right strategy and capability to play the game well, you can compete with almost any budget.