When you advertise with Facebook (or Instagram), unless you have built crazy A.I and machine learning ad-tech, it can feel like it’s extremely difficult to predict just how much bang you’re going to get for your buck. And, while Facebook will tell you they keep the specifics of their ad pricing under wraps, the basic rationale is pretty straightforward. The key to understanding just how this works is putting yourself in Facebook’s shoes. Once you understand the way they think about their business, it’s pretty easy to start getting better value from your advertising.

So, let’s start with the way Facebook views its platform. At the end of the day, Facebook has one strategic goal: to get as many people as possible on the platform, and keep them there for as long as possible. Keep this in mind, because it’s a common theme in almost all of Facebook’s business decisions.

Facebook’s Goal: Keep Facebook Addicting

Their goal of making the platform as ‘addicting’ as possible might sound simple, but it’s a goal that has proven to be a wildly successful one for Facebook. After all, how many people do you know that can go a whole day without checking their feed once? Ten times? Or, even, how many businesses do you know that truly don’t have any kind of social media presence? In terms of raw engagement, Facebook has become more embedded in our lives than any platform in history (let that sink in a moment); even television at its height couldn’t compete with the amount of time people are spending each day scrolling their newsfeed.

But, in the end, Facebook also needs to make money and that’s where advertising has become so prevalent. The trick for Facebook, though, was to figure out how to keep the experience ‘addicting’ for its users, without interrupting the user experience enough to cause users to log off or stop using the platform altogether.

Prices Are Determined By Engagement

In the end, Facebook’s answer to this rather difficult question was a rather ingenious one. Facebook decided to charge different advertisers different pricing based upon how people enjoyed the content each advertiser put out. The measurement for this ‘enjoyment’ has been locked in as the level of engagement with said content – namely, what percentage of users comment, share or take any kind of action with that advertisement.

So, how does Facebook determine what to actually charge? The higher the percentage of users that engage with an ad, the less Facebook will charge the advertiser because ultimately it signals that users desire that content (and are enjoying their Facebook experience). Inversely, if a specific ad has a very low rate of engagement, it likely means that not many users desire that content. In this scenario, Facebook charges the advertiser a higher rate for the placement as it could lead to a potentially ‘less-addicting’ experience for their users.

In the end, Facebook has given their advertisers two primary factors at their disposal to make this algorithm work: (1) the content itself and (2) the audience advertisers choose to target.

Targeting is Key to Controlling Costs

We’ve talked a bit about the content, but almost more importantly, Facebook and Instagram offer unparalleled ability to target individuals by all kinds of different behaviors and interests. In fact the platform even knows when you’re shopping for a car, what type of car you’re shopping for, and how soon you’re likely to make a decision. This is just one example of the incredible targeting capability available to anyone that chooses to use their ad platform.

Therefore, keeping this in mind, the primary questions advertisers have to ask themselves when determining how to best leverage the Facebook ad platform is (1) does this ad align with the audience being targeted and (2) is the content itself interesting enough to drive engagement while still serving to promote the business purpose behind the ad. For example, targeting an audience of people looking at Lamborghinis with ads showcasing the hottest sports cars is likely to have higher engagement (and a lower cost) than using ads incorporating Volkswagen bugs. Facebook will let you show that audience the Volkswagen ads, but the costs might turn out to be pretty extreme.

It’s important to note there are a couple of other things to keep in mind that we will discuss in more depth later, but (1) the number of people competing to target the same audience also plays a part in overall costing. There are only a limited number of times users will accept being shown ads, this limited inventory means that if there are more advertisers wanting to show ads to that group of users, they have to compete with their dollars. If someone is willing to pay more to keep their ads in-front of that audience, the competition will drive prices higher. This is particularly important to keep in mind when you are talking about extremely valuable audiences. For example, I am sure there are more than a few people that would like to get their ads in front of billionaires that live in the United States, but there are only so many of those available – so costs will undoubtedly be high. Additionally, (2) not all content is super engaging in nature. It’s important for advertisers expectations to be in alignment with how interesting their content is in the first place. The maximum engagement rate for an ad about getting a colonoscopy is certainly far lower than an ad promoting fantasy sports. The person promoting the colonoscopy should never expect to pay anywhere near what many others are paying, just by the nature of the topic.

In the End, Focus Should be on Business Goals

Keeping all of this in mind, getting the cheapest costs might not always be the smartest decision for your business, but nonetheless it’s extremely important that everyone understand just how the ad platform works. We will discuss this more in the future, but ultimately the important thing is getting the right content for your business in front of the right audience and eliminating bad content + bad audiences from the equation!

Essentially, to wrap up, Facebook simply wants to keep people ‘addicted’ to their platform — so, naturally, they want to show users ads that improve user experience instead of diluting it. Once advertisers decide on an audience they want to target, it benefits everyone (the advertiser, the user, and Facebook) to make content that’s very engaging for that particular audience.

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