To invest in Facebook Ads, it’s important to define clear objectives, such as increasing sales or generating leads. You need to establish a monthly budget, calculate the cost per acquisition, and monitor the return on investment (ROI).
Any action in marketing must be preceded by careful and accurate planning.
If you want to understand how to invest in Facebook Ads without wasting money and time, you must have the right financial approach and a well-structured strategy. Only then can you maximize the return on investment (ROI) and achieve concrete results.
In the practical guide I have prepared for you, I’ll guide you step by step through the financial planning you’ll need to establish the advertising budget for Facebook campaigns and to reach your goals.
First, however, let’s delve into why it’s so important to define a financial strategy.
Why It’s Fundamental to Have a Structured Financial Approach
First of all, a structured financial approach helps you understand how much and how to spend at each stage of the marketing funnel and the customer journey. Each step requires different investments, which is why you need to know them all!
Moreover, the financial plan helps you forecast performance across various scenarios (optimistic, realistic, pessimistic) and navigate better by identifying and resolving every risk.
A properly structured financial strategy is like a giant magnifying glass for measuring the return on investment (ROI) of each individual campaign and ad set, essential for understanding what works and what doesn’t, and for investing wisely on Facebook Ads.
All the Steps to Have a Proper Marketing Plan
1. Immediately Define the SMART Objectives of Your Business
This is non-negotiable! If you don’t clearly define what you expect from your business, what objectives you want to concretely achieve, you can’t go anywhere.
Rely on the good old SMART method to establish objectives:
- Specific (what you want to achieve)
- Measurable (results must always be quantifiable and measurable)
- Achievable – Attainable (and not pure science fiction)
- Realistic (i.e., relevant and aligned with your overall strategy)
- Time-bound (you can’t act indefinitely, you must set time limits).
Example of a SMART objective: increase sales by 10% in the next 3 months through Facebook sponsored ads. As you can see, you’ve defined the specific objective to be achieved within a certain period and in what way. All measurable with Ads Manager reports.
2. Link Financial Objectives to Advertising Objectives to Invest Better on Facebook Ads
This is where we get to the heart of the strategy, because linking financial objectives to your company’s advertising objectives ensures that marketing campaigns are effective but also economically sustainable. No one wants or should bite off more than they can chew!
Clearly define what you want to achieve with your advertising campaigns, for example, increase in sales, lead acquisition, increase in brand awareness, and ensure that marketing objectives are in line with the financial objectives of your company, which could be, for example, revenue growth or improvement in profit margin.
To better understand, I’ll give you a practical example: if your financial objective is to increase revenue by 20% by the end of the year, you need to plan advertising campaigns to generate the necessary sales.
The ultimate goal of the financial approach is that every euro spent on advertising directly contributes to achieving the company’s financial objectives. I’d say it’s time to get to the heart of the matter and start planning, don’t you think?
Evaluate the budget: break down annual and monthly costs
Plan your annual budget and then divide it by months, considering seasonality and market trends. If, for example, you sell swimwear, you’ll need to allocate more budget in the summer months and less during the Christmas period, unless you sell sports swimwear for swimmers.
Remember that in digital marketing, including Facebook Ads, flexibility is an essential skill and you must adapt your advertising budget based on the results that campaigns achieve. Obviously, you’ll invest more money in sponsored ads that perform better!
Analyze the expected performance for Facebook campaigns
1. Create types of possible scenarios: optimistic, realistic, and pessimistic
If you create different scenarios, you’ll have all the possible performance possibilities in front of you and you’ll be able to understand how to move for each of them and prepare to react in case of any problems.
2. Optimistic scenario
The optimistic scenario is the best you can hope to achieve from Facebook campaigns. Here you can really predict a high conversion rate, a low customer acquisition cost (CAC), and a high return on ad spend (ROAS).
Use the best historical data you have and the most favorable market conditions to model this scenario!
3. Realistic scenario
In the realistic scenario you should instead consider the results of your previous campaigns and from here define a moderate conversion rate, an average CAC, and an adequate ROAS. The keyword: common sense!
4. Pessimistic scenario
And now here we are at the pessimistic scenario, the most feared. Here everything goes a bit wrong and your campaigns don’t achieve the expected results. You should therefore predict a low conversion rate, a high CAC, and a low ROAS.
Certainly, you shouldn’t just sit there if this scenario comes true, but you should have already prepared an attack plan to optimize the advertising campaign.
5. Evaluate the probabilities of each scenario for Facebook ads
After creating them, assign probability percentages to each scenario, examining data from past advertising campaigns.
If you don’t have sufficient historical data, use market benchmarks for companies similar to yours to get an idea of the probabilities for each scenario.
To the optimistic scenario you should assign a low probability, as it represents ideal conditions that don’t occur frequently. For example, you might assign a probability of 10-20%.
A good 60% can safely be reserved for the realistic scenario, precisely because it’s based on the average of real data and typical market conditions.
Not to scare you, but you must also account for a 20% probability that the dreaded pessimistic scenario will occur!
How to strategically prepare for each scenario?
Prepare contingency plans and for the optimistic scenario, plan actions to quickly scale Facebook sponsored ads.
For the realistic scenario, leave your strategy as it is, but be ready to optimize if necessary. And if you should encounter the worst-case scenario, the pessimistic one, be prepared with suitable actions to correct any errors, to minimize losses.
Allocate the advertising budget but first define the blended CAC and nCAC
To effectively allocate or, if you prefer, distribute the advertising budget on Facebook Ads, you need to know in detail the two metrics Blended CAC and nCAC, which help you understand how much to spend to acquire customers and how to divide the budget among different campaigns and strategies. Don’t be scared, now let’s see better what this is about!
How is the Blended CAC – Customer Acquisition Cost calculated?
The Blended CAC is the average cost to acquire a customer and is calculated considering Facebook campaigns as well as all other marketing activities across various channels. The formula to calculate it is:
Blended CAC = Total marketing expenses : Number of acquired customers.
CAC on new customers (nCAC)
The nCAC is the cost to acquire new customers through a specific advertising channel, such as Facebook Ads. It is calculated as follows:
nCAC = Facebook Ads expenses : Number of new customers acquired.
Thanks to these two metrics, it will always be clear which advertising channels perform better, and you can therefore plan your budget to maximize ROI.
Now that you have defined the Blended CAC and nCAC, you can proceed with the strategic distribution of the advertising budget
You have the Blended CAC and nCAC data in front of you, and the most important thing to do now is to see which advertising channels perform better.
I recommend distributing the budget based on historical data, and if, for example, the cost of acquiring new customers is lower on Facebook Ads, invest more money here by planning campaigns to increase brand awareness, retargeting ads, and purchase campaigns to increase sales and ROAS.
And never stop! Keep track of campaign performance and adjust if necessary. Remember what I told you? Flexibility for a marketer is a fundamental skill!
Manage the budget on a monthly basis depending on the time of year
Each market has specific needs, and there may not be the same demand for a product or service throughout the year.
For this reason, you need to have a clear understanding of the sector in which you operate and distribute the advertising budget monthly, with larger investments during periods when demand is higher.
Don’t forget to always leave a reserve budget to be used in case of sudden changes and new opportunities.
The fundamental metrics you should always keep an eye on
1. aMER (Advertising Marketing Efficiency Ratio)
It’s the KPI that tells you how much you’re earning for every euro spent on advertising. To calculate it, use this simple formula:
aMER = Revenue generated from campaigns : Advertising expenses.
If the aMER is high, it’s an excellent signal and means that your sponsored ads have a good ROI.
2. AOV (Average Order Value) for new customers
The AOV indicates the average spend per order by customers who are buying for the first time.
AOV for new customers = Total revenue from new customers : Number of orders from new customers.
A higher AOV is telling you that new customers are spending more and that your advertising strategy is working.
3. AOV for returning customers
It measures the average value of orders made by customers who purchase again. It is calculated by dividing the total revenue generated by returning customers by the number of orders they have made.
AOV for returning customers = Total revenue from returning customers : Number of orders from returning customers.
A high AOV is telling you that you have achieved an important goal that all companies aim for, which is customer loyalty!
4. Repurchase rate
It measures the percentage of customers who make a second purchase and is essential for understanding customer loyalty.
Repurchase rate = (Number of returning customers : Total number of customers) x 100.
5. Gross Margin and exogenous factors
The gross margin calculates the difference between sales revenue and the cost of goods sold (COGS). It is influenced by various exogenous factors such as inflation, shipping costs, and changes in supplier prices.
Gross Margin = (Total revenue – Cost of goods sold) : Total revenue x 100.
For a business, carefully and meticulously evaluating the operating costs for each unit is truly very important. Taking this metric lightly can lead to losses in company profitability at the end of the year, so pay close attention to this KPI!
The importance of historical data that you must know how to leverage
Having data and knowing how to analyze it makes a difference in managing a business and achieving business goals.
This also applies to reports from old Facebook Ads campaigns, which between the lines tell you how to proceed, what your audience wants, and what turned out to be a waste of time.
1. Analyze cohorts over a minimum of 12 months
If you don’t know, cohorts are a group of customers with a common characteristic, which can be, for example, the month in which they made their first purchase.
Analyzing cohorts over a minimum period of 12 months provides you with a complete and detailed view of your customers’ behavior, taking into account seasonality and market variations.
Read here how to analyze cohorts: divide customers into groups, based for example on the month they made their first purchase. For each group, you should analyze the repurchase rate, LTV (customer lifetime value), and the time between purchases.
The collected data allows you to understand when customers buy more, why, and what mistakes you may have made in periods when they didn’t buy, and if and what actions to take to remedy the situation.
2. Know the buying and repurchasing behavior of customers
To reach customers, build loyalty, and respond to their needs, you must understand their buying behavior. Only then will you be able to create spending patterns for each audience segment, anticipate needs, and act accordingly.
Once you’ve collected data on buying behavior to personalize your campaigns, offer discounts or promotions based on your customers’ spending habits. Implement loyalty programs to encourage customers to return, offer rewards, discounts, or exclusive benefits!
Other factors you need to know well
1. Unit COGS (Cost of Goods Sold)
I’ve already broadly explained what COGS means, but let’s look closer at this important metric. The Cost of Goods Sold (COGS) is influenced by a series of other costs including material and labor costs, or any transportation and shipping expenses.
The value is calculated as follows:
COGS = (Cost of materials + Labor cost + Other direct costs) : Number of units sold.
To determine the profit margin you can have on each piece sold, you need to know the COGS. With this value clearly in mind, you can understand where to save on costs, how much to sell to the customer, or what percentage of discount to apply.
2. CAC
The Customer Acquisition Cost (CAC) tells you how much it costs your company to acquire a new customer and includes all necessary marketing and sales costs.
Its importance lies in understanding how advertising campaigns are performing and how you can optimize their results by lowering the cost per customer acquisition.
CAC = Total marketing and sales expenses : Number of new customers acquired.
A lower CAC indicates that you’re acquiring customers more efficiently and allows you to identify the most effective marketing channels for your company.
3. Average customer value over 12 months – Customer Lifetime Value (CLV)
This metric measures how much a customer spends on average with your company in 12 months and is used to understand how much budget you can invest more to acquire new customers, and how strong you are in retention.
Average customer value = Total customer revenue : Number of customers over 12 months.
4. Number of repurchases and repurchase time
The number of repurchases indicates how many times a customer makes a purchase after the first one, while the repurchase time is the time that passes between the first and subsequent purchases of a customer.
To calculate them:
Number of repurchases = Number of repurchases: Total number of purchases – Number of customers.
Repurchase time = Repurchase time: (Date of repurchase – Date of first purchase) : Number of repurchases.
It’s obvious that both these metrics are important indicators for evaluating customer loyalty and predicting future revenues.
Optimize campaigns in real-time: the KPIs you should always monitor
There are indicators that you must always monitor to understand how to act in real-time to optimize ads. Here are the KPIs you need to measure, which are the fundamental tools for maximizing ROI:
1. nCAC (New Customer Acquisition Cost)
It’s the cost of lead generation and new customer acquisition (nCAC), which I’ve already talked about extensively, so I’ll move on to the next metric.
2. CAC Payback Period
To acquire a customer, you spend money, and the CAC Payback Period is nothing but the time needed to recover that “investment”. A short CAC Payback time indicates that you quickly recover the investment made to acquire new customers, improving cash flow.
If you notice that the period between the investment and the CAC Payback is too long, immediately work on optimizing the campaign and maybe offer promotions to encourage faster purchases.
3. NRR (Net Revenue Retention)
Net Revenue Retention measures the revenue generated by recurring customers.
Obviously, a high NRR is a sign of good customer loyalty, which is why I advise you to monitor it at least once a month. If you see the value decreasing, propose loyalty programs or plan targeted email marketing strategies.
4. CRC (Customer Retention Cost)
The CRC is the “amount you spend to retain your customers and includes the cost of” customer support, loyalty programs, promotions, and referrals. A low CRC compared to revenue can only demonstrate that your strategy is working, and how!
5. Contribution Margin
The contribution margin is the difference between revenue and variable costs (unit COGS), and it tells you what profit contributes to covering fixed costs and generating profit.
A positive contribution margin indicates that your campaigns are profitable and contribute positively to your financial goals.
If you notice that the contribution margin is decreasing, review your per-item pricing strategies, optimize production costs, or modify your advertising campaigns.
Conclusions
Before acting and launching into investing in Facebook Ads or other channels, build solid foundations for your company with structured and risk-proof financial planning. Start by setting SMART objectives and then align them with your advertising goals.
Once this is done, you can establish the annual budget and divide it on a monthly basis, according to the needs of your market sector. Create possible scenarios (optimistic, realistic, and pessimistic) and assign a probability percentage to each.
You must be ready for any eventuality! Always keep an eye on the fundamental metrics I’ve talked about and treasure the historical data, which you should analyze often. Always start from data to set up your advertising campaigns, I recommend!
Learn from your customers’ behavior and anticipate their needs. And keep in mind the direct costs, variable costs, and exogenous factors which, together, determine the profit if calculated correctly.
You can’t do everything alone
Marketing is a world with precise rules to know and apply. It’s not always easy, especially for newcomers and for those in the company who deal with other equally important things.
Qreativa is here to support you. Request a free consultation and tell us about your goals. Together we will achieve them!
And if you want to start understanding immediately how to invest in Facebook Ads, follow our free online course, one of the most comprehensive available for SMEs.
