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Meta, the digital advertising giant with billions of users, continually adapts its algorithms to remain competitive. As a performance marketer in 2023, comprehending Meta's evolving ad ecosystem is crucial for optimizing your brand's CPA (cost per acquisition) or ROAS (return on ad spend).
Many marketers, however, struggle with understanding the essential components influencing CPA or ROAS. But don't worry—mastering three straightforward formulas can help streamline your approach, save money and give you a competitive edge on Meta's platform. In this article, I'll demystify these formulas and demonstrate their impact on your marketing strategy.
Years ago, when I started in user acquisition, I wish someone had clarified how these elements intertwine. Grasping these formulas can eliminate confusion, improve testing plans and ultimately drive your marketing success.
Formula 1: APM
Finding the action rate or its cousin APM (actions per mille impressions) helps to get an overall idea of the effectiveness of a campaign. To find the action rate, you're going to multiply the click-through rate by the conversion rate:
Action Rate = Click-Thru Rate (CTR) * Conversion Rate (CVR)
For the mathematically minded, you will notice that the action rate can be computed more simply as conversions/impressions. So, you can find the APM with the following formula:
APM = (Conversions/Impressions) * 1000
In Meta's auction, action rate is used as a measurement of an ad's relevancy. Based on how this metric compares to other ads in the auction, Meta sometimes penalizes or subsidizes ads that are not up to par. Relevancy is very important to Meta's algorithm. The action rate makes up one part of how the algorithm measures an ad's total value metric, which basically weighs how relevant it is to the end user. The ad that wins an auction is the one with the highest total value.
Total Value = Advertiser Bid * CTR * CVR + Ad Quality
or
Total Value = Advertiser Bid * Action Rate + Ad Quality
In the formulas above, ad quality is a combination of feedback from users that includes likes, comments, shares, x-outs, etc.
Scaling action rate into APM is quite handy. As APM is directly tied to action rate, it means optimizing APM is the key to winning Meta's auction.
Formula 2: CPA
Turning the action rate into APM means:
CPA (cost per acquisition) = CPM (cost per mille)/APM
Many marketers overlook this relationship. Uncovering it enables swift performance marketing evaluation. In brand audits, we identify underperformance and create targeted action plans. Instead of vaguely aiming to "improve CPA," it's more effective to state, "We'll enhance CPA by increasing the conversion rate while maintaining CPM and CTR."
To improve one's CPA, you need to either decrease your CPM while holding APM steady, increase APM while holding CPM steady, or do both in concert by decreasing CPM while increasing APM.
To help tackle this, Meta is increasing the volume of ads on the platform to decrease CPM while improving the efficiency of the ad delivery environment, which will improve APM.
Setting up your internal monitoring to reflect CPM and its relation to the components that build APM will allow a marketer to quickly triage and act on how to improve their performance marketing.
Formula 3: ROAS
As stated earlier, APM is a useful metric that is the lynchpin of common KPIs for advertisers. Outside of APM and CPA is ROAS (return on ad spend), which is the other most common metric leveraged by advertisers. Lo and behold, APM allows the construction of ROAS in a unique fashion that highlights the important building blocks of the return.
ROAS = (APM * AOV) / CPM
As we already know that APM is how efficient the advertising is at closing a sale, this shows that ROAS is also constructed with how large of a purchase a person makes on average, AOV (average order value). Also, the costs that the advertiser pays to show the ad is the denominator since your return will decrease as costs increase.
This might seem complicated, but as a marketer, you already know that you can increase ROAS by increasing someone's purchasing frequency when seeing your ad (APM); increasing how much they purchase (AOV); and/or lowering your ad cost (CPM).
Again, we see that Meta's focus on ad volume and ad efficiency will drive an increase in ROAS for the advertisers on its platform. Also, it's useful to understand that CPA and ROAS are intimately linked and not two different views of the world. They are constructed from the same component parts, which means that building out plans that can help decrease CPM, increase APM or do both at the same time is worthwhile for all performance marketing organizations.
Conclusion
The next time you face a marketing challenge on one of Meta's platforms, try using these three formulas. They can help you get to a solution more quickly!
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