They say that business and generating sales is a numbers game. A certain percentage of people who see your products and offers will buy. However, when it comes to direct response marketing and using paid media such as Facebook Ads to drive traffic into your sales funnel or to your website, knowing your numbers is critically important if you want to make a significant return on your ad spend.
One of the biggest mistakes that I see business owners make when using paid media such as Facebook ads or Adwords, is they just don’t know what their numbers are and hence they have no idea what it will take for them to break even or to be profitable.
And this is why so many small business owners lose money when using Facebook ads or other paid media. And knowing your numbers is what differentiates the people who make money on their campaigns from the ones who don’t.
And the mathematics behind the numbers is so simple that a 12 year old could do it. So are you ready to learn the simple ROI formula and 6 critical ad metrics that savvy marketers use to pretty much guarantee profitability from every campaign that they launch?
If you are, here is the ROI formula: CPA<ATV
I am guessing that you’re thinking what does this formula mean? Well let me tell you.
- CPA is your cost to acquire a customer
- ATV stands for average transaction value. This is the value of all of your initial purchases that a customer makes in your sales funnel or sales process when they first enter your business.
And the formula says that, if your cost to acquire a customer is lower than your average transaction value, you cannot be anything but profitable. This maybe very simple but it is critically important to your success if you are using paid media for direct response.
This simple advertising formula was devised by Facebook advertising expert Jason Hornung of Jason Hornung Agency Inc. Jason is one of the world’s authorities on how to profitably scale Facebook ad campaigns.
I also use this formula both for myself and my clients so that I know pretty much what it will take to be profitable when I launch a new Facebook ad or other paid media campaign. These are essentially your bottom line metrics for your business.
However, this formula forms part of 6 vital metrics that you must calculate and know when launching a new Facebook ad campaign or any other type of direct response paid media campaign where direct sales are your goal.
And here are the 6 critical metrics that you must know:
CTR (Click through rate)
CPC (Cost per click)
CPL (Cost per lead)
CPA (Cost to acquire a customer)
ATV (Average transaction value)
LTV (Lifetime customer value)
Knowing each of the above metrics, will dramatically increase your chances of being profitable when you launch your next Facebook ad or paid media campaign. But the only two metrics that really matter are your CPA and ATV.
Your CTR, CPC and CPL are all ad optimisation metrics that tell you how well your ad or landing page are performing.
Your LTV is also an important metric when calculating longer term customer value and depending on your business, this will be measured over a fixed period of time for say 12 or 6 months etc. However, this figure is very dependant on your business and the fixed time period that you use to calculate this figure.
So now you know the 6 vital advertising metrics, how do you calculate them? Well i’m glad you’re thinking that because I am going to use a case study to show you how I do this.
This case study is based around promoting an automated(evergreen) webinar that is selling a £1,000 product and I am using Facebook ads to drive traffic into it. And I want to calculate how much it will cost me to generate 100 new customers.
The first thing that I want to do is calculate the CPA and ATV and then work backwards so that I can calculate the other metrics.
My ATV is easy to calculate as I am only selling a £1,000 product so my ATV is £1,000.
When I start out on a project, I usually set out a benchmark to try and be profitable after 30 days and I usually aim for a £2 to £1 return on my ad spend in this time. Obviously I will better this return further down the line but this is my base when starting off.
So my target CPA or cost to acquire a customer if I want to make a £2 to £1 return will be £500.
From here, I can now calculate the following metrics:
CTR ( you can’t actually calculate this)
And here are some fixed conversion metrics for my landing pages and webinar show up rates that I need to take into account:
Webinar registration page conversion rate: 25%
Webinar show up rate: 50%
Webinar sales conversion rate: 10%
The above numbers are all based off industry standards and from my own experiences.
Calculating Your Campaign Budget
Your campaign budget is simply your CPA x the number of customers I want to generate =
£500 x 100 = £50,000
Calculating The CPL
The next thing we need to do is to calculate the number of leads required to generate 100 customers.
The first thing I would do is to calculate the number of webinar viewers needed to produce 100 customers.
This would be:
Number of customers / webinar conversion rate =
100/10% = 1,000 webinar viewers.
So if the webinar show up rate is 50% then the number of leads required to produce 100 customers is =
1,000/50% = 2,000 leads.
So my campaign target CPL is simply the campaign budget/the total number of leads =
£50,000/2,000 = £25 per lead.
I will now calculate my target cost per click.
Calculating My Cost Per Click
The next thing that I need to do is to calculate the number of clicks required to generate 2,000 leads. To do this we simply divide the number of leads required to produce 100 customers by the webinar registration page conversion rate which is 25%.
So this calculation is below:
2,000/25% = 8,000 clicks
So to calculate my target cost per click I simply divide the calculated campaign budget by the total number of clicks for the campaign which is:
£50,000/8,000 = £6.25 per click
So we have now calculated the 6 critical campaign metrics that tell me EXACTLY what I need to spend in order to generate 100 new customers required to achieve a £2 to £1 return on my Facebook ad spend. Here they are:
- Cost per click = £6.25
- Click through rate = Generally if you can achieve a 2% to 2.5% CTR you will hit your numbers
- Cost per lead = £25
- Cost to acquire a customer = £500
- Average transaction value = £1,000
- Campaign budget = £50,000
And if we hit the above numbers or stay within them, I will have generated £100,000 in sales and made a £50,000 profit. By calculating the above critical metrics, I am not playing a guessing game and hoping I will be profitable.
I know EXACTLY what it will take to be profitable by making some sound assumptions and using basic mathematics. And if you do this for every new paid media campaign that you launch, you will stand a much greater chance of turning a profit because you know your numbers and what it takes to make a return.
And this process is even more critical if you are scaling your Facebook ad or paid media campaign because when you spend big, you MUST know your numbers because things move very fast when you scale and your tolerances and margins will reduce.
If you want to read some more of Jason’s Facebook Ads tips, you can visit his blog here.
So do you use this process when you launch a new sales funnel or paid media campaign? Do you have another method that you use to calculate returns and profits? Hit me up below and post a comment!
Need Some Expert Facebook Ad Help?
If you want some help and advice taking your Facebook ad campaigns to the next level so that you can generate more leads and increase your ROI, then I invite you to book a FREE one on one Facebook advertising strategy session with me. In our session together, I will give you key advice of how you can optimise your Facebook ad campaigns as well as review your landing pages so that you can generate even more leads and increase your ROI from your campaigns.
To book your free one on one Facebook advertising session with me, click here or click the banner below. I will look forward to helping you take your Facebook ad campaigns to the next level.