Facebook Ads: Exploitations in CPM and CPC

Article: http://www.allfacebook.com/cpm-vs-cpc-2010-09

Article: http://talk.adaptly.com/post/6494339698/some-facebook-impressions-are-more-equal-than-others

Facebook offers two basic kinds of payment schemes for ads. The first is cost per 1000 impressions (CPM), which is when advertisers pay solely based on how many times the ad has shown up on consumer pages. The second is cost per click (CPC), which allows the advertiser to pay a fixed amount only when the ad is clicked. Both have advantages in certain situations depending on the demographics of the targeted audience as well as the top priorities of the advertiser, as we will discuss below.

CPC and the “test” phase

Remember that Facebook will always try and maximize its own revenues. It usually (excluding special cases which will be discussed later) achieves this by running an auction in which it displays the ads that have the highest CPM. In order to bid CPM and CPC ads with each other, Facebook likely uses some form of the naïve conversion from CPC to CPM, which is to take the expected value of a CPC ad: CPM = CPC * CTR / (1000 impressions), where CTR is the click through rate of the ad for the user viewing the page (clicks per impression).

Of course, no one knows an ad’s true CTR at any given time. Therefore, when a CPC ad is first created, there’s a great deal of uncertainty in how the ad will perform, especially if the target audience has diverse demographics. Because of this, Facebook puts the ad through an initial “test” phase, in which it monitors the ad’s performance closely. If the CTR of the ad turns out to be terrible (e.g. 0 clicks for the first 10,000 impressions), then the ad is eventually pushed out of rotation and no longer displayed.

In some sense, this is an exploitable property of Facebook’s auction system; one could theoretically create an ad with an incredibly low CTR and run a CPC ad. Using this strategy, the advertiser would succeed in getting many impressions and a high reach at a very low cost by repeating the above strategy over and over again (although it is unclear whether or not Facebook detects this and blacklists or penalizes poor performing advertisers).

With respect to everything mentioned above, keep in mind this is not to say CTR’s don’t matter for CPM ads: they still do! If Facebook knows that a CPM ad has a very low CTR, it might even consider just not showing the ad and instead showing an in-house ad. Remember that Facebook’s goal is to maximize its long term revenues; if ad quality is low and users are not happy with what they’re seeing, they’re more likely to install ad blockers or to simply stop clicking on ads. Therefore, it is important for CPM ads to also maintain a reasonable CTR in order to stay in rotation.

Why CPC?

In addition to the possible exploitation above, CPC ads are also good for getting Facebook to target your ads for you. The Adaptly article above details an experiment in which they switched ads from CPC to CPM. The results showed that the difference in CTR for both ad modes was on the factor of ~15! This demonstrates that Facebook is almost certainly automatically targeting CPC ads to users that it thinks would be interested in the particular subject. In terms of ad metrics, this means that CPC ads have higher CTR’s and are also more likely to generate likes.

Interestingly, the first article mentions that expert optimizers often convert their extremely high performance ads to CPM, the reason being that advertisers rarely pay less than their CPC bid.

Why CPM?

CPM ads allow for the advertiser to reach the largest audience possible while sacrificing the Facebook-internal targeting benefits that come along with CPC. Because of this, CPM ads tend to have lower CTR’s and connection rates. They do, however, require a bit more attention on advertiser’s part because it is in the best interest of the advertiser to bid as low as possible in CPM, simply because the CPM bid has no effect on how well the ad performs. This contrasts with CPC ads in which the higher the bid, the more likely the ad reaches a correctly targeted individual.

Because every advertiser’s situation differs, it is obviously impossible to generalize on whether CPC and CPM is more effective. Rather, it is more important that each advertiser choose the appropriate strategy to minimize their CPX, where X is the metric that they are attempting to maximize.