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DECONSTRUCTING: Are Brands Being ‘Priced Out’ of Facebook Advertising?

Social advertising is a vital element of the digital ecosystem. With over 2.45 billion users, brands are keen to capitalise on the opportunity to reach huge audiences across Facebook. A recent Campaign article stated that rising CPMs (cost per thousand impressions) on Facebook are a concern for 85% of marketers with CPM rates rising 90% year-on-year according to AdStage research and a LiveIntent survey.

At MediaSense we have seen an increased focus on Facebook strategy as brands look to best deploy the platform to gain an advantage over their competitors. In this article we aim to address recent industry concern regarding Facebook cost inflation. To accomplish this, we have explored the key cost drivers across Facebook ads and propose recommendations on how to best utilise the platform.

Facebook Auction Mechanics

To investigate any potential pricing impacts, it is important to understand the auction fundamentals that drive winning bids for impressions.

While often treated independently, as a Paid Social channel, Facebook buying mechanics are not dissimilar to programmatic processes. Facebook operates an auction environment for selling ad inventory, and although the mechanics are not as transparent as other programmatic markets, the auction is based on core drivers:

1 – Bid Price
2 – Estimated engagement / conversion rate
3 – Ad Quality (e.g. quality of creative, volume of text, clickbait characteristics)

In this way advertisers’ bids are combined with the estimated engagement rate and quality qualifiers to select the winning bid – a bid that aims to maximise revenue for Facebook, deliver the highest user engagement and minimise negative feedback from users. However, Facebook lacks transparency around the weighting of price, engagement and quality within the auction process.

Advertisers typically select bid strategies based on the campaign objective and results indicator set-up within campaigns and the platform will optimise towards set goals (e.g. Reach, Video Views, Link Clicks, Conversions). Objectives will differ by advertiser and campaigns therefore comparisons on a CPM level can be misleading as advertisers are optimising towards specific outcomes. Different objectives and historical information will change what advertisers are willing to pay for an impression.

Competition in the platform

To best understand how Facebook auction competition occurs and how competing brands’ strategies are deployed it is worth exploring Facebook’s best practice recommendations for Brand campaigns:

  • Facebook recommend using their in-platform optimisation towards Reach or Ad-Recall
  • Planning guide recommends reaching >50% of the selected target audience at a minimum frequency of 2 per week.
  • Targeting all inventory is advised; delivering across Facebook, Instagram and Audience Network

These recommendations push advertisers to:

a – Deliver more impressions to reach more users
b – Deliver more impressions to increase frequency of ads per user
c – Deliver across all Facebook environments regardless of quality

Accordingly, this drives up demand for impressions, therefore pushing up CPMs and maximising revenue for Facebook and means advertisers are competing on volume. As advertisers increase volume, they are now competing for share of voice on a platform with slowing user growth. In a classic game theory scenario, all competitors are now increasing volume in fear that their competitors are doing the same and that they will lose out should their share of voice drop.

This impact is amplified by the deployment of Joint Business Plans (JBPs) put in place for major global advertisers seeking strategic and commercial value in exchange for the millions they invest in the platform. Naturally this creates a system that encourages volume.

As much as possible, advertisers should explore alternative incentive programmes which are not predicated on driving this volume competition, and instead focus on valuing impressions to compete on different metrics.

Algorithmic Optimisation

Algorithmic optimisations involve automated technology deployed to predict the likelihood of a user completing a desired action based on previous behaviour and other granular performance indicators. Within the Facebook platform this is implemented using “Results Indicators”. We have seen significant swings in CPM rates depending on objectives, which include:

  • Reach
  • Ad Recall
  • Engagement (e.g. Video Views)
  • Link Clicks
  • Conversions

Reach & Ad Recall typically drive the lowest CPM, while engagement optimisation can double CPMs and conversion activity can increase CPMs by a factor of 4. In this way the platform is optimising towards different results indicators and advertisers will pay different CPMs depending on a likelihood of an impression driving engagement or purchase.

Conversion activity will typically drive the highest CPMs as the platform is able to optimise towards a ‘hard’ action and therefore the signals that enable impression valuing are strongest. A high CPM could still drive a low CPA (cost per acquisition) if the most relevant users are served an ad.

Audience Targeting

Target audience scale will also impact campaign CPMs; whereby a broad audience will typically result in a lower CPM. Limited audiences or contextual targeting can inflate CPMs as this reduces opportunities to reach users on the Facebook platform.

Advertisers experiencing inflated CPMs should look at opportunities to amplify their audience targeting; using strategies such as lookalikes to target potential customers. Understanding audience scale before launching a campaign can also help provide visibility of possible CPM inflation causes.

So, are CPMs rising on Facebook and should advertisers worry?

CPMs are likely rising – yes. However, this is largely occurring as different advertisers (particularly DR advertisers) are optimising towards stronger metrics than CPM and are therefore prepared to pay more for higher potential value consumers.

Recommendations for Advertisers

1 – Implement a bespoke auction strategy

In any auction environment the crucial element for effective bid strategy is to best understand the value of winning bids. As has been seen with Google’s shift to first-price auctions across programmatic; auction mechanics have a large influence on optimal bid strategy and the best way to stay competitive and drive results is to bid in line with perceived value of impressions.

This means going beyond CPM rates to value impressions and as such Brands should relate value to desired outcomes e.g.

  • Cost per engagement / conversion
  • Cost per compliant impression
  • Cost per quality impressions (e.g. viewable, attention-grabbing, etc.)

Advertisers should evaluate KPI frameworks to build out a process that best reflects value to their brand and then ensure reporting enables evaluation of these metrics.

2 – Report on a range of metrics to better understand impression value

Metrics reported on should include Facebook performance metrics and ad-verification to provide a holistic view on impression quality, engagement and outcomes. Where relevant 3rd party brand surveys should be deployed to measure brand lift metrics.

By collecting this level of detail and insight advertisers will be better placed to understand value of an impression based on key drivers of performance. By isolating these metrics, advertisers can then use platform optimisation tools (algorithms) to optimise activity towards desired outcomes and compete on a different level than CPM cost and impression volume.

Implementing a long-term optimisation framework will drive gradual improvements in the platforms – delivering more of the outcomes that matter, rather than being sucked into a battle for share of voice.

3 – Explore new opportunities and evolve strategies accordingly

Facebook often rolls out new products and updates that can greatly influence auction strategy. In 2019, Facebook removed reporting metrics such as Ad Relevance and updated video view metrics. This year they have launched additional reporting features for Instagram business accounts to help attribute new followers. These updates change the reporting capabilities of activity and therefore brands should re-evaluate KPI frameworks and bid strategies accordingly.

Beyond Facebook there are other opportunities to explore for brands looking to test new platforms to reach their audiences. Reliance on one platform doesn’t always provide flexibility for brands to best engage with their users and other platforms could offer alternatives to diversify budget allocation; e.g. Snapchat, Twitter, Pinterest, Amazon.

4 – Ensure Joint Business Plans (JBPs) are structured to incentivise the right behaviour

Joint business plans provide the opportunity to develop a deeper strategic relationship with Facebook whilst delivering commercial value across the platform. However, it is important for brands to develop plans that prioritise brand objectives and outcome KPIs to avoid a focus on delivering impression volume, that may not provide the best actual value for brands.

With Facebook budgets playing an increasingly important role in digital advertising, any improvements across implementation have the potential to unlock significant value. However, with significant competition in the platform and constantly evolving capabilities it is essential to look beyond delivering impression volumes and focus on delivering campaign objectives to drive value. For help navigating these challenges, contact us.

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