How Facebook Bidding Works and How to Get Conversions

Markus Ojala

PhD, Chief Data Scientist at Smartly.io

Marketing

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Understanding how the Facebook ad auction works helps performance marketers to drive more conversions. Highlighting some of the best parts of Facebook's Advertiser Help Center, we put together this short guide to bidding best practices.

Facebook hosts a great Advertiser Help Center with answers to almost any question about Facebook advertising. Finding the right answers from such an abundance of information can sometimes be a bit overwhelming, so we put together a short overview of the most essential best practices and a summary of how different parts of Facebook optimization work together. We also included links to further readings, where you’ll be able to dig deeper into the topics.


How Facebook Bidding Works

When Facebook shows ads, they balance between two goals:

  1. Creating value for advertisers
  2. Providing positive and relevant experience for end users

From the advertiser’s point of view conversion optimized bidding achieves the first goal, enabling you to bid directly for your end goal, for example $50 for a purchase. Facebook then turns your bid into an impression level bid by estimating how likely it is that people convert when they see your ad. This makes the bid comparable with the bids of other advertisers who are targeting the same user.

The second goal is covered by relevance score which measures how well the ad resonates with the audience. It takes into account, for example, all the positive and negative feedback the ad gets among its target audience. The more engaging the creative is, the more it gets shown to Facebook users and the more it delivers.  

Facebook combines these two parts together to form the final bid, which happens roughly as follows:

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Facebook estimates action rates on an individual level, i.e., the probability that a person will make an action when seeing the ad. This means you’ll end up bidding higher for people who are more likely to convert. For example, if you bid $50 for a purchase, and the estimated action rate of making a purchase after an ad impression is 0.1% for John, the impression level bid is $50 * 0.1% = $0.05, excluding the relevance score.

The highest bid wins the auction. Since Facebook uses the Vickrey–Clarke–Groves auction model, you pay less than what you bid, namely closer to the second highest bid. With this auction system, the optimal strategy for each advertiser is to bid their true value for a conversion.

True value is the average life-time profit that you make for a conversion excluding the Facebook marketing costs. If you bid less, you lose opportunities. If you bid more, you end up getting non-profitable conversions. So to optimize your Facebook bidding, you should actually optimize your lifetime value estimation for the conversions in your target audience and use that as your true value maximum bid.

Note that by default, Facebook only takes into account those conversions where the user has clicked an ad and made the conversion within 24 hours of the impression. Facebook also allows you to use a longer conversion window, if, for example, most of your conversions come after one day.

 

Average Bidding and Pacing

There are two additional parts in Facebook bidding that are also worth mentioning, namely average bidding and pacing. Before last summer, maximum bidding was the only option Facebook offered. If you know your true value, use maximum bidding to maximize the total profit. If instead, you have an average CPA goal where the profit margins are already included, use average bidding.

If you bid $10, with maximum bidding you will get only conversions that are less than $10. Whereas with average bidding you will also get conversions that cost more than $10, as shown below.

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Avg bid: $48 spend, 6 results at an average of $8 each. 
Max bid: $24 spend, 4 results at an average of $6 each.

 To clarify when to use maximum and average bidding, see the chart below.

Maximum Bid Average Bid
  • Your average lifetime profit for a conversion is $50
  • Max bid is $50
  • You'll end up paying $0-50 per conversion, making them all profitable 
  • Average CPA is less than $50 
  • You maximize profit
  • Your average lifetime profit for a conversion is $50
  • You want to make 50% profit on average (CMO set this target)
  • Avg bid = $50 * 0.5 = $25 
  • Some conversions may cost more than $50
  • Average CPA is close to $25 
  • You maximize delivery

 

Pacing is the final part of the bidding. If your ad set spends its full budget, the delivery is limited by budget, not by bid. In this case, Facebook actually lowers your bid to give you smoother delivery throughout the day and to find the cheapest conversions. The cool thing is that due to pacing, budget optimization is also bid optimization.

 MarkusOblog4.png

 

How to Drive Conversions

Given all this knowledge on how Facebook bidding works, how can we use it to drive more conversions? There is a great Advertiser Help Center article full of best practices for getting conversions. It’s worth reading through.

 Guide: Everything you need to know about getting conversions.

 (In case you have issues accessing the link, use a cached version)

 We collected some highlights from the article, covering the top questions we get asked:

  • How many conversions do I need per day?

At a minimum, your ad set needs to be getting 15-25 of the conversions it's optimized for per week to have a chance to succeed. Note: 15-25 is only the bare minimum. 50-100+ is ideal.

  • When should an audience have its own ad set?

Only separate a target audience into its own ad set if you'd bid differently to reach the people in that audience compared to those in your other audiences. Otherwise, combine your audiences into one ad set with a larger budget. Note that if your message and creative are different, then splitting the audience is suggested.

  • Does switching between automatic bidding and manual bidding affect performance? 

It shouldn't affect performance if you're keeping your bid consistent. The root cause of poor performance is more likely bidding too low, not switching between automatic and manual bidding.

  • Is there any advantage to starting out optimizing for link clicks and then switching to conversions? 

We don't have evidence of this improving delivery of ad sets that are eventually optimized for conversions. 

Have you found great articles from Facebook Help Center? Share them here. 
 

Markus Ojala Markus Ojala

PhD, Chief Data Scientist at Smartly.io