This article introduces you how Facebook ad auction works delving more into details how budget and max bid affects your campaign performance.

Introduction to Budgeting

Nosto focuses on delivering the overall service in co-operation with Facebook. Nosto’s responsibility is to provide the tools in the Nosto admin panel and the optimized product data feed for Facebook, which is responsible for displaying the ads for the right audience.

All the guidelines described in this article should therefore be treated as generic and overall guidance on how to set budget and optimize Facebook advertising. Nosto doesn’t provide consultative services how to optimize your campaigns or marketing spend as this is a role for marketing agencies and in-house marketing departments and experts.

However, guidelines describe how the budgeting and bidding works on Facebook’s ad auction, providing some basic information and best practices. In case you are new to Facebook ads as an online marketing tool, Nosto recommends running a short-term campaign with a reasonable budget to establish a better understanding what would be a suitable and effective spend and bid price for your business, as these vary based on the business size, industry, time, competition and market area. 

Nosto’s and Facebook’s default pricing model is Cost-Per-Impression so effectively you  pay for Facebook per thousand impressions and to Nosto only if those visitors buy something. You can also use Cost-Per-Click pricing, but this is often not the best performing option.

Daily Budget Guidelines

Daily budget is the maximum daily spend allowed for the campaign. As a general guideline, the daily budget shouldn’t be too small as otherwise you won’t have budget to spend to win impression bids and consequently traffic. 

Remember overall guidelines for customer acquisition costs (CAC), which fundamentally should define your marketing budget. Let’s assume that your new customer acquisition cost is around 50 euros per acquisition. This means that you might need to spend the same amount per day to get one conversion. Average CAC is typically between 20-100 euros in fashion online retail, which suggests that prospecting campaigns should have at least 20€ daily budget, but preferably at least 100€, if target is to acquire one or two new customers a day. With re-targeting and re-engagement, CAC is lower as the audience is already engaged with the site, hence budgets for these campaigns can be adjusted respectively, all depending on your ad targeting strategy and to which business objective you want to use Facebook ads e.g. acquisition, re-targeting or both.

To ensure that enough traffic can be bought, the default value of 20 euros or US dollars is advisable minimum daily spend also for smallest business sizes, but obviously stores with more visits and sales should invest more.

Budget and Audiences

Daily maximum budget is not spent in case Nosto and Facebook can’t find suitable target audience based on campaign’s settings or if the audience is not considered valuable, which also indicates a possible delivery issue.

Max spend is solely to ensure that the spend doesn’t exceed set boundaries and budget. In addition, Facebook by default spends the budget evenly throughout the day, meaning that if you have a campaign with 100€ or USD max daily spend, Facebook tries to get you valuable traffic evenly throughout the day and also throughout the campaign time period. This is called ad pacing, which also controls that you won’t spend your budget only for bidding more expensive customers, but spend budget equally keeping max bids at reasonable level.

If you repeatedly don’t spend your whole daily budget it might indicate a delivery issue caused by targeting options covered in a separate article. Regarding budgeting, a common way to fix this is to increase your bid to win more impressions and also more valuable audience.

Facebook tracks online activity and generally knows quite well, which users are more likely to buy something online, hence these customers are more expensive to target with ads, whereas users who seldom shop online are cheaper to target. Facebook’s own system estimates the likeliness of a conversion when your ad and bid participates into an auction. This means that those users who are more likely to convert cost more to advertise. In an event that your max daily budget doesn’t allow meet the expected value of a conversion, you’re not able to target a valuable individual. To prevent this, Facebook tries to spend your budget evenly throughout the campaign lifetime so that you would get steady stream of visits and conversions.

Facebook’s Auction System

Facebook is running one of the largest ad auctions on the Internet and as a Nosto Facebook ad user, your ads participate automatically in the online auction. However, the auction doesn’t work like a traditional one: The highest bid is not always enough to win it. A well-performing ad – e.g. high click-through rate and positive ad engagement (conversion) – with a combination of high enough bid will allow you to win the auction and get your ad shown on Facebook.

Keeping this in mind, Facebook wants to provide as enjoyable user experience as possible for the users and cutting the number of ads is one way to do that. In other words, Facebook wants to display only ads which are relevant for the user, whereas Nosto optimizes this further by delivering more relevancy in terms of products shown in the ads. Facebook doesn’t disclose thoroughly how the process works, but has shed some light on it in this article.

As an example, if you bid $1 cost per click (CPC), you’ll be charged no more than $1. And, in most cases, you’ll be charged much less. Even though it could sound a bit irrational, higher maximum bid generally improves both delivery and return on ad spend (ROAS). With a low bid you can reach people that are easier reached, but don’t necessarily provide the expected result (conversion) as these users are less valuable and thus the bid price is lower. As the system is an auction, don’t try to bid as low as possible and rather have some flexibility in your budget when you use impression based pricing so that you can reach maximum amount of users who might be interested in your offering. 

Setting actual budget is an art form of its own and requires some experience in online marketing hence these guidelines are to help you to get started, but ongoing optimization is always specific for each business and based on repeated tests and experience.

Other Bidding Best Practices

As a general rule, don’t change bids and budgets too often as it might cause problems when Facebook re-processes your ads. It is OK to change these if a campaign performs well and you want to adjust settings, but avoid changing settings repeatedly for example every second day. Let campaigns deliver some results after changes and make further amendments based on new insight you have obtained.

If you have CRM data available and you know your best customer segment in terms of customer lifetime value (CLTV), run separate campaigns by limiting audience sizes and target most valuable users with higher bids and budgets to best customer groups as the expected outcome is better.

Last but not least, best performance is achieved when you don’t try to achieve lowest imaginable price for your ads, but rather track the true value of the traffic and don’t try to achieve ad optimization based on lowest imaginable visit price. Instead, use cost per acquisition and return on ad spend as a metric.

Industries And Areas

Countries and markets with high standard of living such as United States, Norway or Switzerland to name a few, typically require higher budgets so that your ads can compete in the auction. On the contrary, developing markets or regions e.g. India and Turkey generally enjoy lower prices, keeping in mind that quality and engagement rate is also an important factor to win the auction.

Industry or vertical is also a factor affecting prices. Traditionally competitive verticals such as baby- and toddler stores and in some degree fashion, where acquiring a customer can be extremely valuable in terms of customer lifetime value, but expensive in terms of initial customer acquisition costs (CAC), require higher budgets as prices of impressions and click bids are higher. Businesses such as online tea shops most likely enjoy lower CAC and therefore enjoy cheaper prices to win the auction.

Testing is again the key to success. In case of website conversion based ads based on impression pricing, choose your objective based on your budget and audience. 

If you opt-in to use manual bidding, Nosto suggests to keep the minimum bid at least at 0,50 Euro or USD and to fine-tune this in case it seems a bigger bid is required. Keep in mind that the maximum bid is only the limit that you allow Facebook to spend per a click. It is not the price you will pay for each visit. Typically the realized click price will be significantly lower and you can track this in the analytics.

Seasonality

Seasonality also affects  prices. During high-seasons such as End of the year holiday season, Black Friday and Virtual Monday, online marketing budgets are much bigger consequently leading to higher prices in the auction due to increased competition. This means that prices that you paid  during other times of the year, might increase when sales roar and traffic peaks. Adjust the budget accordingly based on your experience of seasonality. A rule of thumb is to increase the budget notably during peak periods, but as always, seasonality affects differently different areas and verticals hence testing and knowing what works for your business is again the key.

Auto-bidding

Nosto suggests to use automated bidding and website conversion based campaigns, which is controlled by the Auto Bidding switch being enabled.

If you are not sure of the value or just want to get maximal amount of the targeted actions for your budget, you can use auto bidding and let Facebook take care of everything. It basically means that Facebook chooses an ideal bid on behalf of you, which Facebook thinks will win you the best impressions at the best price. You still control the overall daily spend so only the maximum bid is adjusted and optimized automatically by Facebook. 

Manual Click Bidding

If you are more experienced in Facebook marketing, know your rough CAC, thus know what would be an ideal bid for your store, enable the manual bidding by flipping the switch and define the max bid to the input field which you are willing to pay per a click / visit.
Manual bid allows you to have more control over what you are willing to pay, but can also lead to a situation where you don’t win any impressions if the bid is too low. More about bidding on Facebook’s support center.

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