Talk in Smartly Connect Berlin about how Facebook bidding works.

1. Lightning Shop
How Facebook bidding works?
Markus Ojala, PhD, Chief Data Scientist
Smartly Connect Berlin 2017-04-27

2. How do you set the bids now?

3. Two basic
strategies
Bid constrained
KPI limit
Maximize delivery
Budget constrained
Fixed budget
Maximize performance

4. You bid $30 for a purchase.
Does John see your ad?

5. Bid value for the
desired outcome
Estimated
action rate
Relevance &
qualityX +Bid =
Maximizes advertiser value Optimizes consumer
experience
Conversion
Optimized
Bidding
It’s simple.
You can bid directly
for your end goal.

6. Ad quality
score effect
Your final bids are
different!
+
Examples
of final bids
Your purchase bid is $30
The average conversion
rate is 0.2%
For John, FB predicts
higher conversion rate of
0.5% thus final bid
= $30 * 0.005 = $0.15
For Kate, FB predicts
lower conversion rate of
0.1% thus final bid = $30
* 0.001 = $0.03

7. How much
do I pay?
Facebook uses Vickrey–Clarke–Groves
(VCG) auction
Charges each individual the harm
they cause to other bidder
Your cost is close to the second
highest bid (VCG is a generalization)
You pay always less than your bid -> profit
Optimal strategy for each
bidder is to bid their true value
True value = full life-time profit you
get for a conversion
Excluding the Facebook marketing cost

8. Simplified
example
Advertiser B
Purchase bid $100
Estimated action rate 0.1%
Final bid = $0.10
Advertiser A
Purchase bid $30
Estimated action rate 0.5%
Final bid = $0.15
Advertiser A wins and pays $0.10
This would give them 33% expected profit margin
Per impression $0.05 or per purchase $10 profit in average

9. Bid your true value

10. Optimize the true
value estimate,
not bidding

11. How do you estimate
the true value now?

12. Estimating
true value
Average lifetime profit
per conversion excluding
Facebook marketing cost
FB attribution: default is one day
click-through
if 70% of conversions come in 1d click,
scale bid by 1 / 0.7 = 1.43
Longer conversion windows and view-throughs
support added recently
Your true value is usually higher than you
think due to, e.g.,
Viral effect, word-of-mouth
Repeated purchases
Forgetting view-through conversions

13. Maximum
vs average bid
Average bid
If you care more about maximizing delivery
and conversion volume within an average
cost threshold, you should probably use
average cost bidding.
Maximum bid (in prev slides)
If you care more about every result you're
optimizing for costing no more than a given
amount, you should probably use maximum
cost bidding.

14. Bid
examples
Average bid
Your average lifetime profit for
a conversion is $50
You want to make 50% profit in average
(CMO says)
Avg bid = $50 * 0.5 = $25
Some conversions may cost more than $50
Average CPA is close to $25
You maximize the delivery
Maximum bid
Your average lifetime profit for
a conversion is $50
Max bid = $50
You’ll end up paying $0 - $50 for a
conversion making each of them profitable
Average CPA is less than $50
You maximize the profit

15. Optimize
towards
last funnel
step
Optimize for conversion events that occur
at least 15-25 times per ad set per week.
Example funnel:
link clicks -> view content -> add to cart -> purchase
When changing goals, estimate new bid amount
For example, $50 purchase bid
About 10% of add to carts lead to purchase
Bid add-to-cart with $50 * 10% = $5

16. Pacing
maximizes
the profit
Facebook finds the
cheapest conversions
throughout the day
if budget limits
https://www.smartly.io/blog/bid-optimization-pacing-on-facebook-explained

17. Due to pacing,
budget optimization
is also bid optimization

18. Read more:
https://www.smartly.io/blog/how-facebook-bidding-works
-and-how-to-get-conversions
Markus.Ojala@smartly.io