Why Ad Costs Are So High... And What To do About It
Holy long post Batman! Hope you’re ready for this one.
Advertising costs on Facebook have gone up 125% since the beginning of 2017.
That’s insane. For most businesses, taking an increase of 125% in any cost will hurt. In advertising, it’s could sink their main method of generating revenue.
If your biggest cost center grows by such an amount, it exposes a fatal hole in your business: the reliance on a certain volatile cost staying the same in order to generate revenue profitably.
So businesses have come up with several solutions. The first one is just to grit and bear it for now, because they’re still profitable. Lucky them.
The second one is to get the hell off Facebook entirely and move to other digital channels (or even traditional!) Some doom-and-gloom pundits say that Facebook is ‘dead’ as a marketing channel.
The third one is the hardest by far, but it’s really the main answer to the problem. They’re changing the way they advertise on Facebook. They’re changing their marketing strategy to one that allows them to utilize Facebook’s strengths.
Of course, there’s nothing wrong with changing your marketing mix if you need to reallocate due to revenue considerations. That’s a pivot. That’s just good business.
However, what most companies do in order to combat rising costs is reactive. A smart company is proactive about it and is ultimately able to make it work.
The important thing to consider is that the businesses most affected by this are the ones with the largest budgets. They see themselves taking huge hits because a large cost center has become even costlier. Smaller budget businesses able to see 20x ROAS on their advertising efforts are not too worried. Companies that don’t spend much of their marketing budget on Facebook are not too worried either.
It’s businesses that were able to make Facebook work in such a way that it justified pouring more and more of their money into that channel, that are taking the brunt of the damage. And it’s them who are going away.
Is that your business? It certainly is mine!
The company I work with historically spent over 90% of their marketing budget on Facebook. Facebook advertising was the largest line item (next to foreign exchange, I believe). We were spending almost a million a month on Facebook at one point.
We first started seeing the writing on the wall in 2016, when the company started. But because the CEO is a seriously good marketer with over a decade of experience in online direct response advertising, he knew that he would be able to make it work.
And even though we’re taking a serious beating on Facebook, we’re not only alive, but we’re thriving. We’re growing. Our prestige and popularity is exploding. We’re in the hands of celebrities who are endorsing us without us even asking for it, let alone paying them money!
But we knew it wouldn’t always be this way. That is one of the biggest reasons why the CEO decided to hire a larger team. In august 2016, it was him and a developer. In august 2017, the team was 5 people. In august 2018, the team became 15.
I was hired not so much to make Facebook scale on our current strategy, but to be able to implement even more complex and novel strategies that we weren’t implementing before.
In the month I was hired, March 2018, the shit really hit the fan. Nothing we did was able to bring down costs.
After months of iterating and a big campaign, July 2018 was our record profit month with our best ROAS to date. However, we’ve hit the snag again. Our iterations only lasted so long.
It’s now time to do something different.
But why are we even facing this issue to begin with?
There’s a simple law (yes, law) that I’ve described in the past that goes like this: as an advertising channel grows profitable for more and more advertisers, costs will go up in tandem with the increased profit sought by said advertisers.
Basically, it’s just competition.
But that’s not the only issue. Facebook has dealt with increasing competition on its ad network for years. Why is it now that costs have skyrocketed more than ever before?
Facebook has come under fire for privacy issues. This (among many other things) has resulted in Facebook removing many of its targeting options and parting with third party data companies. Advertisers who wish to use third party data must get permission from those third party companies and must provide the list to Facebook themselves: Facebook will no longer provide it.
Not only that, but you must tell Facebook where you got the data.
Audience Insights has also seen a bit of a nerf, as well. You used to be able to see the Facebook usage and trends of any audience you wished to plug into it. Now you can only see trends for your own page, a few other pages on Facebook, interest categories, and geo.
This has caused a greater degree of increased competition on larger slivers of Facebook’s audience.
But that’s not even the worst of it.
Facebook is losing users. Worse yet, time on site has gone down. Facebook’s stock price dropped because user growth has petered out to a huge degree.
This means that many people who used to be on Facebook no longer are. This also means that there is a lower overall amount of ad spaces. Competition goes up even further.
But that’s not even all! Facebook has decided to take steps in improving overall ‘web hygiene’. Facebook is actually taking measures to make sure people don’t spend as much time on Facebook!
They’re lowering overall feed space, which means Facebook users now see fewer overall posts than they used to.
This includes ads.
So Facebook is actually REMOVING some of their own inventory!
Combine all of these factors and you have a severe shrinking of overall ad inventory.
This would be okay if total advertising volume on Facebook went down in tandem with it. But no, that has not happened yet!
It likely will, though, as Facebook has become too expensive for many businesses to operate on it!
There’s another factor I haven’t mentioned yet, though.
So we all know that Facebook is a data collecting machine. Aside from Google and Amazon, Facebook has the best easily accessible consumer provided data around.
Facebook’s ‘big brain’ actively learns about people’s buying patterns using the information provided by advertisers through the Facebook pixel.
Facebook is better able now to predict whether or not someone is likely to purchase a given product or service.
Since advertisers can optimize for purchasing a product on their website (and they often do), advertisers are essentially bidding on people who are most likely to buy a product. And that’s where a large chunk of advertiser dollars are going.
Not every person on Facebook is worth the same. Since every person represents a variety of ad spots, some people are worth vastly more than others.
I hypothesize that this gap is increasing and will continue to increase, despite Facebook removing a large chunk of its targeting options.
So competition will continue to focus into a tighter and tighter group of people (a group that always changes, mind you) and these people will be the most expensive to go after.
Unfortunately, this also means that Facebook is also able to segment out people who are NOT likely to take any actions. That’s why it’s much cheaper to run a video view, page post engagement, or clicks to website objective campaign on Facebook.
You’re not actually reaching the same people when you optimize for those things.
More and more advertisers are realizing that they get their highest conversion rates when they optimize for purchase and base their delivery on how valuable those customers are to them.
As a result, competition will always go up.
The shock to the system has been Facebook’s ad inventory going down. Of course, Facebook isn’t the only place they have ads: they have Audience Network, Instagram, and Messenger after all. I wouldn’t be surprised if they continue to look for places to run more ads to they can continue to grow (or invest in the creation of such places).
All in all, it seems like an insurmountable problem. But it’s not, and here’s why.
I said earlier that advertising costs will always, as a law, go up in tandem with the profit sought by advertisers. If a channel becomes profitable for many advertisers, expect advertisers to be willing to bid more so they can get more of it. This is because advertising is a controllable, scalable way to grow a business.
Facebook is no different. But how do advertisers compete?
Let’s go back to the three solutions.
Number one: grit and bear it. Accept it and move on, because you’re profitable overall anyway. This mentality is actually a cause of higher costs, because if advertisers (especially gigantic brands that only spend 15% of their entire marketing budget on digital, and that 15% amounts to millions per month) are willing to deal with it, then there is no subsequent reduction in costs.
If you cannot do this as an advertiser, then you gotta choose from 2 and 3.
Number two: jump ship. Many advertisers looked at Facebook and realized that they’re paying so much for eyeballs (no matter how good those eyeballs were). They said ‘fuck it’ and decided to change their strategy. Leave Facebook and go to Google Shopping, Amazon display, Youtube, or native platforms, or even Instagram (which is still a Facebook property).
Those advertisers often see their KPIs as CPMs, CPCs, and conversion rates. They figure that they can keep conversion rates constant with their selling strategy, so as long as their CPMs (and CPCs) go down, they’re good!
However, this means going against your company’s core competencies and making assumptions that you cannot be sure of. Why WOULD your conversion rates stay constant when you’re advertising to different people at different times? On Facebook, people are bored and want something to appease their boredom. On Youtube, they’ve found something to appease their boredom and they’re waiting to engage with that content. No wonder Youtube is so much cheaper: you’re advertising to people who’d rather not be bothered!
It’s an inherently different method of advertising and requires a different marketing skill set. You have to be SO MUCH BETTER at getting attention and standing out. You have to take larger risks in order to get that attention.
But... that doesn’t mean it’s bad.
In fact, excellent companies have omni-channel strategies and teams built specifically for each channel, along with a stand alone marketing department that makes sure that the integrated marketing communications all promote the same message.
Utilizing a little bit of number two (hah) is the way to make it work in the long term. But what about now?
Number three, as outlined before, means changing the way you market on Facebook in order to utilize the strengths of the platform the best.
Big businesses generally have the following protocol in place for constant optimization:
• Testing new audiences
• Testing new ‘marketing angles’ or campaigns
• Testing new creatives (visual, ad copy, link) within an adset
• Testing new features that Facebook rolls outlined
• Testing different placements
• Testing bid strategies
...and so much more.
Most of these businesses do them pretty well, too. They choose a single variable to manipulate and run a test version against a control version (aka a classic A/B test).
But they lose something while doing this: they lose the strategic perspective while focusing so much on the tactical.
The testing is not the problem. Testing is a required activity for fast iteration and incremental improvements that add up over time.
The problem is testing for the wrong reason.
Most businesses will test things just to get those incremental improvements. They will use the same strategy overall, often never testing most of the elements of their strategy.
They will make small improvements on the landing page without changing the way their landing page communicates the message. They will change the headline without changing the focus of the headline. They will change the image without changing the elements of the image that are likely to resonate with people.
Piecemeal improvements, again, are perfectly fine... unless the problem is something bigger!
Our CEO saw the writing on the wall as early as last year. He had a gut suspicion that we would need to improve on the very essence of our advertising.
It would even require a change in branding.
It didn’t mean that the way we were advertising is inherently bad. It’s not. But it wasn’t cost effective. So here’s some example numbers.
We would launch a landing page with the intent of moving them to our website. Our website would then convert them to buyers.
Our landing pages were written in an advertorial style. We would report on a variety of concerns, appeals, and so on in order to get people to read the article and eventually, learn more about our products.
Again, none of this is bad.
But when we first launched this strategy, we were amazingly profitable.
By the time we decided to kill this method of advertising, we were barely breaking even.
Our costs on the front end had gone up considerably (even when I was doing enough creative testing to double and triple our clickthrough rates!) These cost increases were gradual but we knew there was a point where it could no longer be helped.
Our core audience had gotten, I shit you not, 3x more expensive. Broad audience costs went up by 30%.
Our clickthrough rates from the landing page to our website was around 12%. That’s not different from what it is now.
Our website consistently converts... but conversion rate is VERY seasonal. In some months, we will be able to make it work no matter what we do. In other months, we need serious reductions in cost.
It’s just a fact of life.
But even regarding the seasonality, advertising costs on the front end have gotten so expensive that this method of advertising simply isn’t what we want to do anymore.
We know this because our clickthrough rates on the ad are consistently pretty high. Not only that, but we have multiple landing pages to choose from, each with different appeals. There is an inverse relationship between clickthrough rate on the ad, and clickthrough rate on the landing page.
Ultimately, we convert a certain percentage of ad traffic and this rarely changes.
One big weakness in our strategy is that we were paying for almost all of our traffic. Organic traffic came as a result of what our product did for people (then they’d tell their friends). It didn’t come as a result of our advertising message being inherently interesting!
People rarely shared our articles with their friends, because these articles were very clearly advertisements (enticing as they were) and as far as advertisements go, they were only interesting to people who really wanted what we were offering.
So we decided to shift our strategy. Inherently interesting messaging that people want to talk about.
Many people call this ‘viral marketing’.
But we’re not just posting things hoping for a hit. Nope: we’re doing it using the full power of our multi million dollar budgets provided to us by the profit generated by the company in its early stage.
We’re stepping our game up, doing what brands like Dollar Shave Club, Purple, and even Geico have successfully done: create ads that people actually want to watch, share, talk about... and that back up the efficacy of our products.
Most brands try to do this but they fail, because it turns out that it’s not easy to create interesting content if you don’t know what’s interesting to your audience. Not only that, interesting content may not be ‘shareable’ as such!
Our first attempts at this weren’t all that great, but they were promising. They showed us the power of video and creativity. But now we’re going big. All chips in.
It requires the conviction that only a group of people hell-bent on changing our industry have. It requires doing things that other brands in our industry are scared to do. It requires generating a healthy level of controversy.
The most recent example of an ad campaign that does this well is Nike. Nike recently launched a ‘Just do It’ campaign... this time, with Colin Kaepernick. Kaepernick is an NFL quarterback who kneeled during the national anthem as a protest against police brutality against black people.
This protest is extremely polarizing. Nike decided to cash in by officially taking a side: Kaepernick’s side, by featuring him in an ad.
Sales skyrocketed. Nike got hundreds of millions of dollars in free press. People on both sides created their own videos and posts talking about it, some of it going viral.
Nike’s ad campaign was so good, it made OTHER PEOPLE go viral on the back of it. If that’s not something, I don’t know what is.
So, you might be wondering, is the answer to combating high CPMs on Facebook to just do viral marketing?
No. It’s just one answer.
If you haven’t started anything on Facebook and are put off because advertising costs are so high, here’s a tip for you.
Don’t be scared.
You have the ability, as a new advertiser, to go in and learn what works for you. To find your own audience on the platform. To do what you want to do, providing the content you want to provide.
If you start advertising and you find that the CPMs are too high, it doesn’t mean that Facebook is useless. In fact, you don’t know what you don’t know when you first start (even if you’re an experienced marketer starting a new Facebook ad account!)
But if you’re going to start, just know a few things.
1. Facebook is a platform built to assuage boredom. Create ads that get attention and pique interest quickly.
2. Facebook has the data to show you the people that are the most likely to buy your product. Use it. With enough work (and upfront spend on data), you should be able to get a ROI, even if the scale is miniscule.
3. Facebook newsfeed isn’t the only placement, and the other placements require different things in order to get attention.
4. There’s a fuckton to learn about Facebook ads. I’ve been doing this for years, have spent millions, and I’m nowhere near an expert. I literally learn new things every single day,
Don’t be scared.