Social Media Advertising Effectiveness

Setting

Away, a direct to consumer (DTC) luggage brand, has been advertising on Facebook to acquire new customers[1].

Should it continue Facebook advertising?

Before diving into any analysis, think of the information you need to make this decision. Broadly speaking we need to know the cost of advertising and the profit generated from it. 

Breaking it down further, we would need the following information:

  • How much money Away spent on Facebook advertising in a particular period? Assume it spent $15,000 per month.
  • What does Away get for the money it spends on Facebook? Typically, Facebook and other media companies offer ad impressions at a certain rate. For example, Facebook may charge $15 per thousand ad impressions, often referred to as CPM (cost per mille or thousand).[2]
  • Some percent of consumers who see this ad click on it, called clickthrough rate or CTR, and are directed to Away’s website. Let’s say CTR for Away’s ad is 1%.
  • A small proportion of consumers who click on the ad and land on Away’s website would eventually buy. Assume this conversion rate to be 2%.
  • We now need to know the average money spent by these consumers who decide to buy. Assume the average spend of consumers who buy is $250.
  • To assess the margin, we need to know Away’s variable cost. Let’s say it is $100 per order on average.

With this information we can now assess the effectiveness of ads given the monthly ad budget ($15,000) and the CPM rate ($15).

[1] The example is taken from Gupta, S. (2020): Quantitative Analysis in Marketing, Harvard Business School.

[2] CPM rates vary depending on product category. In 2020, the average CPM rate on Facebook was about $7. Facebook and Google also sell ads based on clickthrough rate or CTR. In 2020, the average cost on Facebook was $1 per click ( see webfx.com/social-media/how-much-does-facebook-advertising-cost.html).