How Facebook Auction Works - MGR Blog

How the Facebook Auction Works

Just like Google Ads, Facebook also uses an auction system to determine the best ad to show to a person at a given point in time. Billions of auctions take place everyday across the Facebook family of apps.

The goal is for the winning ad to maximize value for both people and businesses. For this reason, it is critical to understand how the ad auction works to maximize your ad performance without overspending your budget.

When you or your ad agency creates ads for your business, they are telling Facebook who they want to show your ads to by defining a target audience. A person can fall into multiple target audiences based on a number of factors associated with the individual’s profile. For example, one advertiser targets men who like Golf, while another advertiser targets all Golf enthusiasts who live in Arizona. The same person (in this case, a male Golf enthusiast who lives in Arizona) could fall into the target audience of both advertisers.

When there’s an opportunity to show someone an ad, the ads with a target audience that the person belongs to are eligible to compete in the auction.

How Does Facebook Determine the Winner of the Auction?

To ensure that the winning ad maximizes value for both people and businesses, the winner of the auction is the ad with the highest total value. According to Facebook, the total value is a combination of 3 major factors:

From Facebook:

  • Bid: The bid placed by an advertiser for that ad (in other words, what the advertiser is willing to pay to achieve their desired outcome). There are multiple ways to manage your bid in the ad auction. To learn more, see About Bid Strategies.
  • Estimated action rates: An estimate of whether a particular person engages with or converts from a particular ad (in other words, the probability that showing an ad to a person leads to that desired outcome of the advertiser). Note: Engaging in clickbait and engagement bait does not improve ad performance.
  • Ad quality: A measure of the quality of an ad as determined from many sources including feedback from people viewing or hiding the ad and assessments of clickbait, engagement bait and other poor user experiences. For more information on how Facebook measures ad quality, see Avoid Creating Negative Experiences for People Who See Your Ads.

Together, estimated action rates and ad quality measure ad relevance. Ad relevance is so important, that Facebook claims that they subsidize relevant ads in auctions, so more relevant ads often cost less and see more results. In other words, an ad that’s relevant to a person could win an auction against ads with higher bids. Facebook provides an ad relevance diagnostics tool to analyze whether the ads you ran were relevant to the audience you reached.

So that’s in a nutshell how the Facebook Ads auction works.  Again, not too different that Google Ads, albeit, with some differences due to the very nature of each marketing channel.

Setting Up Your First Campaign

For illustrative purposes, let’s assume that you want to advertise and sell a single product and use Facebook/Instagram as your preferred marketing channel.  The first steps, are quite obvious:

  1. Select Your Product
  2. Create a unique landing page and store to manage your sales. This could be Shopify, WooCommerce, or your own booking engine if you’re selling a hotel room special offer.  Just keep it simple, clear, and concise so that your visitors and prospects will find a seamless process.
  3. Add all necessary tracking to your landing page/store page. In the case of Facebook, you will definitely want to make sure that your Facebook pixel is installed properly.  You may also use Google’s UTM tracking for additional information about your visitors’ sources.
  4. Create your ads. This is obviously one of the most critical element as far as getting people to be interested in your product.  For Facebook, I recommend starting with at least three types of ads:
    • Prospecting Ads: based on your target audience, broad related interests and geographic locations. A good start is to create 1 Ad Set per broad interest, each of them with one creative that includes two variations (A/B Testing).  In other words, for 3 broad interests, you will create a total of 6 ads.
    • Retargeting Ads: As soon as you start generating traffic from your Prospecting Ads, you will want to engage your retargeting campaign. Remember that 90%+ of your audience will not convert the first time they see your ads.  That’s why retargeting is so critical for your overall conversion rate.
    • Instagram Ads: a combination of news feed ads and Instagram Story ads works best in this case.
  5. Optimization Phase: For this phase, proper timing is key. Optimize too soon and your ads will constantly be in the “Learning Phase,” which means you will not allow either Facebook or yourself to learn much about how your campaign is performing.  Wait too long and you will be wasting money on under-performing ads.  Usually, 2-3 days is a good time frame to be able to make decisions.
  6. Budget Adjustment: Once you’ve been able to determine your “winners and losers,” it’s time to remove the losing ad sets and boost the budget for the winning audiences and ad sets. You can also add new creative to the winning ad set to highlight other features of your product.
  7. Rinse and Repeat: Self-explanatory. You’ve discovered which ads sets and audience are performing best for your product, so keep optimizing it and scaling your campaign keeping a close eye on your ROAS, Average Cost of Sales (COS) and your Customer Lifetime Value (CLV) to determine the campaign budget that will work best for you.

This is the strategy that we’ve seen working best for new products based on Facebook’s current algorithm.  In an upcoming article, I will focus on some more specific details regarding testing, ads “do’s and don’t’s” as well as other optimization techniques.

As always, if you need any assistance with your eCommerce marketing, our MGR Team will be happy to chat with you one-on-one.  Use this link to contact us and set up your free consultation.

Thank you for reading.  Until next time, this is Manuel Gil del Real (MGR).