Facebook eCPM: The first (and only) thing you need to know
It’s common knowledge that when we advertise on Facebook we must win an ads auction outbidding other advertisers aiming to show their ads to the same potential customers of ours. Of a minor knowledge, and paramount importance though, is the process that Facebook deploys to determine which of the plethora of available ads we are exposed to, are to be shown at the right time, in the right placement, to the right person.
When we build a Facebook campaign, we are asked to set a bid which represents the maximum amount we are willing to pay for a specific result. Monetary-wise, Facebook claims that by bidding one’s true value (that highest bid you can put on the table to reach your minimum profit cost) an advertiser will maximize the performance of a campaign and get a lower Cost per Result basically every time.
But is there anything else needed to know?
There must be, as the added value of Social Media Advertising - compared to traditional media channels (TV, Radio, Newspapers) - is that they can provide a customized and unique offer to the users according to the behaviors and interests that they manifest. Simplistically, nobody will see the same ads I see on my news feed as they will not be fitting everyone equally.
There are millions of advertisers trying to reach the same targeted profiles every single day and Facebook has to make sure to serve users with the most relevant ads as the Vickrey-Clarke-Groves auction is designed to amplify the advertiser’s value while personalizing the consumer experience. The Facebook ad auction therefore is built to maximize value for both people and advertisers in a way that users are shown what they may be looking for and businesses make good profit off of their advertising. For this reason, in such a tailored marketplace, the amount of money one bids for its campaign goal is necessarily only one of the many other factors that may allow an ad to fill a Facebook slot. The winner of the auction isn't indeed automatically the ad with the highest monetary bid but the ad that creates the most value; and that’s the stage where an unlimited amount of users’ information combined with an extreme accurate elaboration of big data take over and make Facebook stand out from its competitors.
The FB algorithm relies on a sophisticated mathematical equation that calculates a Total Advertiser Bid as a result of the maximum monetary value a user puts at stake multiplied for the estimated Action Rates (clicks or conversions according to the final campaign goal) that an ad will get plus the relevance of one’s creative in terms of positive (interactions, shares, time-swell) and negative signals (X-outs, quick scrolls, jump rate etc.) and more than other thousands factors that go into an ad performance prediction (user history, ad history, account history, user characteristcs, device, page type etc.) that compose a global quality score. It’s worth-knowing that within the relevance factors indicated above it’s also included an organic score. There surely is a maximum number of ads that a user can see per day but rather than a quantitative competition, it’s a qualitative selection of what people can potentially see in their news feed; which means that native ads will also compete against some portion of organic content and get viewability in case they can provide a smoother and seamless experience to the user’s journey. In short, Facebook is capable to make reliable predictions of what is the most relevant organic piece of content and what is the most relevant ad a user may see and then balance those things against each other to build an accurate benchmark. Given the fact that an ad will never show up first in anybody’s news feed, a piece of paid content may also end up competing against some organic posts (in feed) and for this reason gets an organic bid.
Total Bid = Advertiser Bid * Estimated Action Rates + Ad Relevance
We have then seen that the first element of the above equation - and often times the most abused - is the Advertiser’s bid, Facebook, though, offers four different bidding types:
CPM (Cost per Mille/1000 impressions maximizes towards reach): Ads are served to anybody while trying to reach as many people as possible at the lowest cost.
CPC (Cost per Click maximizes towards useful clicks only) : Ads are served to users who are most likely to perform a click relevant to the campaign objective.
OCPM (Optimized Cost per Mille) maximizes impressions towards users who are most likely to take the action you want while still paying per 1000 impressions.
CPA (maximizing towards an App Install) : Ads are served to users who are most likely to install an app on their smartphones.
In many branding campaigns Facebook is called to weigh advertisers using the same bidding type, the evaluation is therefore immediate as it’s easy to compare apples to apples but what’s up when the bidding types are completely different one to another as many are the cases in which the same person can be within the targets of multiple businesses using different ways to bid for? How can Facebook calculate which is the most competitive bid? How does it compare different bid types which end up competing in the same auction? Realistically, if Clothes.com runs a website traffic campaign, targets Men 18-35 in Italy, bid $0,30 per Website Click and Wallets.it runs the same campaign, target Men 18-35 in Italy and bid $1 CPM, how would Facebook compare these two completely different metrics in order to determine who will win the Ad auction? In the same way how would an $1 oCPM bid for example be measured vs a $1,30 CPC bid?
The only way Facebook has to equalize all bidding types fairly is to reduce them into a single common standard which is unique no matter what one bids for.
As previously seen, Facebook, opposing to all other platforms which rely on a 2nd price auction (Google, Twitter, Snapchat), claims that its personalized Ads auction based on a hybrid of the Vickrey-Clarke-Groves model guarantees the most viewability at the cheapest price to all advertisers out there. Therefore, when businesses with the same or different bidding types end up competing for one ad slots, Facebook has to make sure they are charged the right amount of money for the users’ value and the level of personalized experience they provide. The total bid - which as said takes into consideration all of the BEAR factors already mentioned (Maximum Monetary Bid, Estimated Action, Relevance) - is more specifically decomposed into an economic value called eCPM (Effective cost per Mille) and while the total bid determines the position in the Ad Auction, the eCPM dynamically helps calculate the final Cost per Result an advertiser will pay according to how much value is lost from the rest of players competing in that auction. The Cost per Result is therefore what comes out of the ratio in the eCPM equation as this relies on a countless amount of big data that the sophisticated Facebook IQ has stored and re-elaborated to produce a final economic cost and a predictive total value.
Let’s see this in details how all bids are reduced into a unique eCPM value and what are the factors influencing the viewability of an ad:
If we bid CPM
eCPM = Max Adv Bid/1000 + QS
The system takes into consideration what the ad is willing to pay for 1 single impression plus the relevance score. There is no action rate prediction here as we maximize to reach as many people as possible in our targeted audience without asking them to take any specific action.
If we bid CPC
eCPM = Max Adv Bid * eCTR + QS
The system will calculate the number of impressions needed to have one click (Estimated Click-through-rate) plus the Relevance of the ad. The Action Rate is now included in this equation and basically it creates a proportional relation with the final eCPM. The higher the eCTR will be the higher the eCPM will be (the lower you will need to pay to win the auction as we will see).
If we bid oCPM
eCPM = Max Adv Bid/1000 * eCTR * eCVR + QS
The system will calculate what an advertiser is willing to pay for 1 impression multiplied for the probability of a click and the likelihood of a conversion happening after the click (estimated conversation rate) plus the relevance of the Ad. Compared to the previous one, it’s not how likely to be clicked your ad will be but also how likely the user is to take the action ad advertiser wants after the click (e.g. buy something on a website). If we target high clickers but users who then have a low purchase intent, our ad will be pushed down in the ad auction and will struggle to win another auction with less valuable users. It then may have to compensate with a higher monetary bid to achieve viewability. On the contrary if we target somebody who has already a good history of completing similar conversions and actively looking for a new one, the eCVR will be higher.
If we bid CPA
eCPM = Max Adv Bid*eCTR * eCVR +QS
This equation is very similar to the one above, though, in this case, we are not considering how much an advertiser is willing to pay for 1 impression as he will only be charged for acquisitions (App installs specifically).
To make it more practical we can make an example of having both the eCPM and an hypothetical total value as a result of the estimated Action Rates plus the quality score of an ad. Let’s dig deep and see what’s the process Facebook uses to determine what’s the value lost for each advertiser.
Ex. We have 2 available ad slots in an ad auctions and three businesses (A; B; C) targeting the same people with different bidding types. As a result of the previous formulas, let’s imagine the assigned values:
A: eCPM : $0,50; Total Value: 100%
B: eCPM $0,30; Total Value: 80%
C: eCPM $0.20; Total Value: 0% (as he is the 3rd in the auction he won’t get any viewability).
It is fundamental to take into consideration that what one will pay is the result of the total value lost by the advertisers ranking below him in the Ad auction. The amount of money that one decides to bid is not directly reflected in what will be the final CpR.
B: This advertiser has a 20% gap to his competitor and an eCPM of $0,30, therefore the value lost from this advertiser is $0,30 *0,2 = $0,06
C: According to the same process, the value lost from this advertiser is $0,20*0,8= $0,16
Now that we know the value lost from all advertisers, we can calculate how much each one will need to pay:
C: Won’t get any delivery so he is not paying anything and taken down into a less competitive ad auction where his total value and eCPM could get to cheaper and less valuable users.
B: Will pay the value lost from all advertisers below him: $0,16
A: Will pay the value lost from all advertisers below him: $0,16+0,06 = $0,22
Once Facebook determines the eCPM of all winning advertisers they are reverted into the CpM, CpC or CpA that will be the final amount that a user will actually pay. Needless to say an ad enters millions of auctions like the example given in one single day on Facebook and they determine the overall cost of a campaign.
All that shown above simplistically proves that a monetary bid cannot help much if an ad is not high-quality or very relevant as there are 2 more important factors in the equation that must be necessarily taken into account. Being Facebook a platform which is born to serve users and not businesses bidding high may not be problem-solving or decisive. What one bids influences what ad slots he can get but not what he’s going to pay. One the contrary an irrelevant ad content or wrong targeting may thwart any economic exposure and compromise the upshot of a business goal. Basically what the equation is mathematically saying is that if our ad is compelling and we target the right people we need the minimum amount of money to get it shown, on the contrary, if we are not being users-oriented we must fill that gap by paying more money to outbid competitors as the value lost will surely be higher.
Understanding how the VCG Ads auction works and the process how whatever bidding type is converted into a standard eCPM bid is the first and only thing all advertisers need to know as it includes all the wherewithal for a Facebook advertising success. We may game the system a couple of times but there cannot be any profitable outcome on the long run if we do not clearly master the Facebook basics and get our hands dirty on the gearwheels of its complex algorithm and all internal and external factors that could influence the Ad auction. All advertisers need take into account that their only way to get viewability is by creating relevant and impactful experiences to their users rather than to themselves.
Dario was an Account Manager for Facebook for almost 2 years guiding EMEA SMBs to establish successful Facebook strategies and increase their ROI. He then worked as Account Strategist at AdGlow - a Facebook, Twitter, Amazon, Snapchat and Pinterest Marketing Partner - scaling the online advertising activity of big brands and media agencies mostly on Facebook, Instagram and Snapchat. He then founded TechSounds where he currently helps various businesses globally to make their brands resonate on social media platforms through online advertising.