Running Facebook ads is exciting, waiting for results to come piling in with the champagne on ice.
How Much Can You Afford to Pay For a Customer With Facebook Ads?
Running Facebook ads is exciting, waiting for results to come piling in with the champagne on ice.
But if you got 50 sales, for example, have they been worth it? Have you paid too much for them and could they have actually cost you money?
To figure this out, you need to know your CPA (cost per acquisition), and it’s important that you figure this out before running your ads.
You can do so by using this simple formula:
Total Ad Spend ÷ Total Attributed Conversions = Cost Per Acquisition or Action.
Now that you have the answer to how much you’re paying per acquisition, you need to figure out if it is affordable.
If we spend £50 and get 10 conversions, that’s £5 per conversion – But how much are those conversions worth?
If those 10 conversions resulted in £100 in revenue, first glance would suggest that we have spent £50 and made £100 – we’ve doubled our money, great!
BUT, we need to factor in our profit margin, too.
If we have a 40% profit margin, that means every £100 in sales = £40 in profit, but we’ve paid £50 to gain that £40 in profit, so we’re actually -£10. We’re down a tenner.
So, that’s not good! This tells us that we can only afford to pay a maximum of £40 per £100, that would mean we breakeven.
This is where you need to take into consideration the LTV (lifetime value) of your customer, too.
If you breakeven on the first £100 sale, but they have a lifetime value of £1,000 – then that’s a win! They’re going to stay in your buying cycle and you’ll end up with £1,000 in revenue, and £400 in profit if we keep to the 40% margin example.
It comes down to what your business can afford when it comes to cash flow and revenue percentages, so it’s important you get ready and know your numbers before you begin.
We often shock our customers when we display these numbers to them and they realise they have actually been running what looks like successful Facebook ads, at a loss, or at least making a lot less money than they first thought.
If you’re wondering what kind of results you could get with an agency like us, fill out this quick form to schedule a chat. We’d love to dive into your goals and see how we can help you achieve more success with Facebook ads.
