It’s no secret that Facebook ads are a big part of how campaigns get projects some serious funding. However, if you don’t completely understand all the costs that go into advertising, you could be bleeding out money and not even know it.
Imagine you’ve hired a crowdfunding consultant to run your Facebook ads and after a week of ads they told you “We’re earning $4 for every $1 we spend on ads, it’s working great!”
That sounds like a no-brainer to keep plowing every dollar you have into ads because you’re getting a 4x return, but this is completely wrong.
You can earn $4 for every $1 you spend on ads and still lose money with every sale!
How in the double hopped-up hell does that happen?!?
To unpack what’s going on here, it all comes down to the numbers.
FUCK YEAH MATH WOOOOO YEAH WOOOO YEAHHHHHH MATH MATH MATH (If you’d rather skip the math, here’s a spreadsheet I made to do all the math for you)
The Truth about Facebook Ads
In order to know if you’re actually making money on Facebook ads, you need to know:
1. The exact dollar value of sales the ads have earned
2. The profit margin of your rewards, including shipping and tax
3. How much you’ve spent on each ad
4. (Optional) How much you’re paying someone to run your ads
Without these numbers, it’s impossible to tell if your ads are profitable.
1. Know the exact dollar value of sales the ads have earned.
Every link you use on a paid ad needs to be set up for link tracking of some sort, otherwise you’ll be unable to tell how well each ad is performing. Although it may get tedious to create so many links, having an individual link for every single one of the different ads you run is essential to maximizing your spend because you know exactly which ad of yours is doing the heavy lifting.
The quickest way to do this is through Kickstarter’s referral link generator on your campaign’s dashboard page, but Google’s Campaign URL Builder is far far more powerful and only requires that you have Google Analytics set up for your campaign (which you should). Both of these tools allow you to give specific names for each of the links you create so it’s easy to tell which ads led to which sales and which ads are duds.
2. Know the profit margin of your rewards, including shipping and tax.
Let’s say you’re selling bespoke Edible Underwear (strawberry flavor) with the following price:
$40 sales price
+ $15 shipping price
- $15 cost to product (including tax)*
- $10 cost to ship and fulfill
- $5.50 (Kickstarter and Stripe’s ~10% cut of gross sale price)
=$24.50 profit margin (45% profit margin)
*Hey, these are ultra-premium Edible Underwear, not the cheap fruit-rollup kind! Of course they cost that much!
Your profit margin of $24.50 on the undies is also conveniently the most you can spend on ads for one sale before you lose money on ads. But with ads often ranging between $0.10 and $0.50 per click, there’s no way we’d spend that much, right?
3. Know how much you’ve spent on each ad.
This is a little more complicated than it initially appears.
No matter how awesome your ads are, there’s no way that every ad you post will return in a sale because no one buys everything the internet tells them to unless, well, hmm, I can’t think of an unless so we’ll leave it at that.
Because not everyone who clicks an ad buys, we’re back to discussing our old friend conversion rates. Assuming that on average, between 1-5% of people who click your ad will purchase, we can quickly estimate how many ad clicks we’d need to buy in order to get one sale to determine if we even should be using ads.
To get a quick estimate of how much you’ll be paying in ads for each sale, multiply your estimated cost per click by 20 (to estimate a 5% conversion rate) and by 100 (to estimate a 1% conversion rate). For example, if you’re estimating the average cost per click for your campaign is $0.20, it’ll cost between $4 and $20 to land one sale.
For our Edible Underwear, we can afford these rates because it’s less than our profit margin, but this isn’t always true for every campaign.
4. Know how much you’re paying someone to run your ads.
If you’re not running the ads yourself, there’s a cost here too. One of the more common pricing methods used by consultants running Facebook ads is charging a flat fee up front (usually between $1,000 and $10,000), plus a percentage cut of gross ad revenue (usually from 10-35%).
That’s a substantial payout of cash, so these ads have to put some serious numbers on your campaign in order to be a net positive for your business.
Why earning “4x your ad spend” is a problem.
In the case of the aforementioned Edible Underwear, if we spent $55 on ads, earned $220 in revenue, and assume we gave our consultant a 25% cut of gross ad revenue with no flat fee, that means that:
- 4 units were sold through ads ($55 gross rev per unit since ad rev is quoted as gross)
- Profit on 4 units is $98 (only net profit matters, not gross)
- Advertising spend is $55
- Consultant cost is $55
- Total profit from ads is -$12.
4:1 on your ad dollars and you’re losing money with every pair of underoos you sell.
Know your costs or risk a loss.
While it’s technically true to say you’re earning $4 for every $1 spent on ads, I find it deceptive. This language ignores your actual net profit (the important thing) in favor of presenting a sexier number. Even if it’s not done maliciously, it can easily confuse you into thinking you’re making more money than you actually are. I was duped by that language when I first started learning how to run Facebook ads, and, full disclosure, I used this language too, before I learned better.
When you’re running Facebook ads for your campaign, check to make sure the math still works in your favor.
If you’ve got live ads, or are looking into running them, snag my free facebook ad cost calculator spreadsheet and math-it-up!
And if you’re even cooooler, why not pick up a copy of my book, Six Figure Crowdfunding