Every Tuesday, without fail, the postman ambles up our front path, deposits a fat stack of brochures, mailers, and flyers in our mail box, before moving on to repeat the process next door.
I’ll be honest. The vast majority of these mailers make a very short trip to the recycling. Of course, there’s no way for the businesses - who no doubt spent a small fortune on these mailers - to know whether I read it, or simply threw it in the trash.
It’s impossible to know what kind of return they’re getting on their marketing.
Comparing this with Facebook ads, then, is like night and day. You can track exactly how every penny of ad spend is working for you - whether your goal is to grow your audience, make more sales for your ecommerce store, or simply to build up awareness.
Properly run Facebook ads let you take an emotional decision - "How much should I spend on Facebook Ads?" - and turn it into a rational decision - “How much can I afford to spend to get a return on my investment?”
This question, and the resulting answer, is the key to making Facebook ads work for your business.
Want an easy way to work out your Facebook ads budget? I’ve done all the math for you in a handy Google spreadsheet - all you need to do is enter a few of your own numbers and you’ll see exactly how much you can afford to spend on ads. Click here to grab your copy now, then keep reading for instructions on how to use it.
Just like my mailbox full of brochures, Facebook ads on their own won’t help you grow your business.
They’re great for getting your message in front of a highly targeted audience, and getting them to click through to your website, pick up their phone to call you, or send a message to your Facebook Messenger inbox.
They’re only a single piece of the puzzle, though. You need a process to turn that traffic into new business - whether it’s leads filling out a form on a landing page, or customers purchasing a product from your online store.
Once you understand how all the pieces of that process - your sales funnel - work together, you’ll know exactly how much you should be spending on your Facebook ads - and the exact return you’re getting on your investment.
Let’s break it down.
There are a few key numbers you should know before you start, or at least have a pretty good idea of, based on your existing organic traffic.
This one’s pretty easy - what percentage of visitors that land on your website turn into sales?
For most ecommerce businesses, this’ll be somewhere around 1-3%, depending on what you’re selling and to whom. You can break this number down even further:
For consultants, coaches, and other entrepreneurs, it’s a little more complicated. You might have multiple conversion rates - for example, the percentage of people that sign up for your free webinar after viewing your landing page, and then the percentage of webinar registrants that end up buying your product.
Let’s say you run a webinar, and out of 1000 people that view your registration page, 300 end up registering - that’s a 30% conversion rate for getting leads. When you run the webinar, 100 people attend - that’s a 33% conversion rate from registrants to attendees - and 10% of the attendees buy - that’s a total of 10 sales from 300 registrations, or an overall conversion rate of 3.3%.
Once you know your conversion rate, you can work out how much you expect to earn from each lead.
If you’re running an ecommerce business, you can simply work out how much you expect to earn per visitor to your site. Let’s say your average order value is $60 - if your conversion rate is 2%, then your EPL would be $60 x 0.02 = $1.20. That means every visitor that lands on your site is worth, on average, $1.20.
If you’re selling more expensive products or services, you’ll want to work this out at the lead level instead of the visitor level. Say you’re selling a one-off website audit for $1000 on the webinar I mentioned earlier. Out of 300 people that registered for your webinar, you make 10 sales at $1000 each, for a total revenue of $10,000. Your EPL, then, becomes $10,000 / 300 = $33.34 - that means for each person that registers for your webinar, you can expect to earn an average of $33.34 in revenue. Not bad!
Your cost per lead, or cost per conversion, measures how much it costs to, well, get a lead. Once you’re up and running with Facebook ads and you’re tracking conversions with a Facebook pixel, you’ll be able to pull this number directly from Facebook’s ad reports.
For ecommerce businesses, this will simply be the cost per click on your Facebook ads. Let’s say you’re running a well-targeted ad that’s bringing in clicks for $0.40 each. Going back to our example before, if you’re paying $0.40 for someone to click your ad and visit your site, and you know that every visitor is worth an average of $1.20, you’re killing it.
Facebook can also measure the cost per lead generated. Again, back to our webinar example - let’s say each click on your ad costs you $3.00. We already know that 30% of people that visit the registration page are actually registering for the webinar - that means each registration costs you $3.00 / 0.3 = $10. Seems expensive, but you know that each registrant will net you an average of $33.34 in revenue - so paying $10 to make $33 is a no-brainer.
If you’re just getting started with Facebook ads, you probably won’t know your cost per lead yet - that’s OK. As long as you’ve worked out your earnings per lead, that’s your baseline - for your business to be profitable, your cost per lead needs to be less than your earnings per lead, or you’ll be losing money on every sale you make.
For most businesses, a good baseline to work from is a ratio of 3:1, revenue to expenses. This means to make your business profitable and worth your time, you shouldn’t be spending more than one-third of your revenue to bring in enough leads. If you’re spending more than that, you’re likely not making enough profit for the business to be viable. If you’re spending less than that, great - that means more money in your pocket!
Now that you have a good baseline for how much you’re spending and making on each sale, you can work backwards to get a good idea of how much you need to spend to hit your business goals.
Let’s go back to our webinar example from before. Your goal is to sell 10 audits a month - that’s $10,000 per month in revenue. You’re also planning to use webinars as your main sales channel.
Using our 3:1 rule of thumb I mentioned earlier, you know that to make $10,000 in revenue, you want to spend a maximum of $3,334 on advertising, leaving $6,667 in profit.
To make 10 sales, based on the conversion rates we worked out earlier, you know you need 100 webinar attendees, or about 300 webinar registrations. This means you can safely spend up to $3,334 to get 300 registrations, or $11.11 per registration, and still meet your profit goals for the month.
The same math works for ecommerce stores, as well. Going back to our ecommerce example from earlier, let’s say you also want to bring in $10,000 per month in revenue. You know the cost of manufacturing your products averages around 50% of your sale price, so you’ll actually have to generate $20,000 in sales to reach your $10,000 revenue goal.
Using our 3:1 rule of thumb, you should aim to spend less than $3,334 on advertising to bring in $20,000 of sales. Based on the conversion rate we calculated earlier, for every visitor that lands on your site, you expect to earn $1.20 in sales revenue - so you need 16,667 visitors to reach $20,000 in revenue. This means you can safely spend $3,334 to get 16,667 visitors, or $0.20 per visitor, to reach your profit goals.
There’s one final number that’s good to know - what’s your break-even point? What’s the absolute maximum you can spend on ads and still make a profit? To find this number, simply divide your total revenue by the number of visitors to work out the maximum you can afford to spend for each lead. In our ecommerce example you could spend $10,000 to gain 16,667 visitors, or $0.60 each visitor. If you find yourself spending more than this break-even value to bring in customers, perhaps it’s time to rethink your business model.
Here’s the bad news. There’s no single number that works for every business, since every business is unique.
But - now that you know your sales funnel conversion numbers (go crunch those numbers using my free spreadsheet below if you haven’t already!), you can tell me what you can afford to spend.
Can you afford $8 per lead based on your conversion metrics? Then go run some Facebook ads - start by spending $500 or so and see if you can generate leads at that price.
If you find you’re able to generate leads for $4 each, then the decision is an easy one - spend every penny you can get your hands on! If you can spend $4 and make $8, you should advertise all day long.
If your ads aren’t generating the $8 per lead you need to be profitable, you’ll have to do a bit of testing:
Since you’ve got the numbers you need, you’re able to spend less money on testing, and make faster decisions to grow your business.
If you’re ready to get started, I’ve got some homework for you:
Don’t let your hard-earned marketing dollars get thrown out with the rest of the junk mail. Ask the right questions, measure the right numbers, and you’ll start seeing an ROI on your Facebook advertising real fast.
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