Thursday, March 21, 2013

Social Media Ads: Should You Be Buying Them?

It depends on your LTV. If you know what that is, stop reading here. If not, stop your campaigns and take a moment to think things through.
It has been possible to do self-serve advertising on Facebook and other social media sites for a good while now. But should you really go ahead and do so, and if yes, how much should your ad spend be? In most cases you pay when a user clicks on your advertisement and hops over to your website. Is buying such ads a waste of money, or a smart spend?
In old media such as with newspaper ad placements, knowing this was difficult and generally a certain budget was allocated to advertising. Perhaps a company would decide to spend $1000/month on placing ads in the local paper and hope for the best, never quite knowing if the investment in ads is making a difference to the bottom line.
With online advertising, it actually is quite possible to have a good estimate of how effective your ad campaign is. You can know this by tracking your customer from the initial ad click all the way to the purchase. By knowing how much a potential customer profits you on average, you can know whether buying the ad was wasted money or not. For example if you paid $50 to get a customer that only makes you a $10 profit and never comes, that wasn't such a great investment.
To make a useful estimate, you need to have three pieces of information.
First, how much is a customer worth to you? As an example case, take Candy Japan, my online subscription service where you get Japanese mystery candies sent to you twice a month. After observing the retention (how long customers stick around) of current subscribers for several months, a conservative estimate was made that each new subscriber would be worth at least $20. This is also called the LTV (LifeTime Value of the customer).
Second piece of information needed is: how likely would a person be to subscribe after clicking on your ad? If you have never advertised before, you might be surprised how low these numbers can be. In most cases it takes hundreds of ad clicks for a single sale to happen. If you are paying $.20 a click, you could easily spend more to find a customer than you can ever hope to make back in sales.
Unfortunately you need to spend money initially just to know what your conversion ratio might be like. For Candy Japan it was found to be less than 0.25%, meaning that over 400 clicks are necessary to make a single sale. Third piece of information you need to know is how much a click costs. Typical values here are between $0.10 - $1, depending on targeting options. This is called CPC (cost per click). With these pieces of information, you can now determine if you should continue your current ad campaign.
You need to keep in mind that each of these three factors is campaign-dependent. One campaign might have a lower cost per click, but lead to poor quality leads that are unlikely to sign up or make repeat purchases. Another campaign on the other hand might have a very high cost per click, but have an amazing conversion ratio and bring customers that stick around for years.
The exciting part of being able to track ad spending at this detail is that if you can find a campaign that is profitable, you can expand it without limit. Forget setting a $1000 ad budget, if you can find a money-making ad campaign where each dollar spent makes you two dollars back, you want to spend as much as possible on it.
In reality you should be very careful though, as the profitability of an ad campaign can get worse over time. As the same people are seeing your ads multiple times, the most eager customers have already signed up. Savvy advertisers keep track of how well each ad channel is doing over time, jumping in to tweak or discontinue any campaigns that are no longer profitable.
A well run campaign can give a boost to sales, while a poorly tracked campaign can be a huge waste of money. Whether you should be advertising on social media is a decision that can be made based on real evidence, as long as campaigns are carefully tracked and the value of new customers clicking over from those ads is well known. Sometimes the right answer is not to continue your campaign. Candy Japan is currently no longer advertising on Facebook, as the cost for finding a new subscriber was found to be too high.

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