One of the most common questions business owners have around digital marketing is, “How much money will we make from running Facebook ads?” As the president of a digital agency who works with owners and senior marketing teams, I’m asked this almost daily.
The common wisdom business owners hear is, “Well, you can’t really calculate ROI from social media directly.”
Hogwash. We do it all the time, and the formula we use to understand how marketing spend will influence revenues is simple.
First, we start with the costs side – what you’re spending on the ads (and, if you’re working with an agency, their costs to prepare the ad, get it deployed, and manage the bid rate as the campaign runs).
Once we have that, we move on to the revenue estimates.
Step 1: Reach
The critical metric for calculating your ROI is “reach” – in other words, how many people your campaign will be seen by. All other calculations fall out of that. While reach does vary seasonally and is based on how much competition is in the ad market, you should start with the rough assumption that you will reach 1,000 people for every $20 of media spend. So if you are giving Facebook $750, you can expect to reach roughly 37,500 people.
Now that we have a rough reach estimate, we look at two important factors – click-through rate and conversion rate.
Step 2: Click-through rate
For forecasting, we assume a 1-per-cent click-through rate (CTR) – that means that for every 100 people who see the ad, one person will click it. While we usually get a much higher CTR for our clients, we deliberately start with a low number to forecast conservatively. You can increase your CTR by first deploying several low-budget ($300-$500) campaigns that test a variety of messaging, audience targeting groups, and bid strategies, then run larger budgets against the groups that are generating the higher CTR.
Step 3: Conversion rate
The second number, conversion rate, defines how many people who click the ad go on to buy something. This number depends entirely on what you’re selling. If it’s a low-price and easy-to-buy product (like a downloadable e-book), you might get a 25-per-cent conversion rate or higher. If it’s a higher-end product (say, legal services or life insurance), you should expect a lower conversion.
One note on conversions: Not every conversion can be tracked directly online. If you’re selling new condos, nobody is going to pay for one online with their credit card. In this case, your conversion event will be booking a tour, or requesting a call from a sales rep. In those cases, you’ll have one more conversion to consider: going from a lead to an actual sale.
Let’s assume we’re selling life insurance and we get $850 a year in revenue from each client. With our original $750 media spend, we know we’ll reach about 37,500 people. If only 1 per cent of those people click the ad, we now have a pool of 375 people. Then, if we know from past experience that 15 per cent of people who visit our website become clients, we’ll have about 56 customers at the end of that process, and 56 people times $850 in revenue is $47,600.
Then, we bring basic costs back into the equation. There’s the $750 we spent on the ads, and $3,000 for an agency to design, set up, and deploy the campaign. Our costs are $3,750.
Finally, we simply divide our costs ($3,750) into our projected revenue ($47,600) and we have an ROI of 12.7 times – in simpler terms, for every $100 we invested into Facebook ads, we can expect to generate about $1,270 in revenue.
While ROI forecast models can (and sometimes must be) more complicated, this process will give you a general sense of whether it’s worthwhile to try social advertising.
It’s important to remember that industry averages change over time, so some of those numbers (notably, CPM – how many people you’ll reach for the money spent) may need to be adjusted.
Anyone who tells you that you can’t estimate ROI on Facebook ads simply hasn’t done the math.
Tod Maffin is president of social engagement firm engageQ digital. He’ll be speaking at the 2019 Globe and Mail Small Business Summit in Toronto. To download engageQ’s free Facebook Ads ROI Calculator, visit http://re.tc/roi.