- Nov 29, 2022
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Today, we will explore a relatively rare traffic acquisition strategy in Facebook Ads—Bid Cap. Various methods for setting a Bid Cap circulate online, including:
- Setting it based on CPM.
- Setting it based on Cost per Lead.
Bid Per Impression
Bid Per Impression (BPI) is a crucial component of the auction in which our ads participate. Each ad has a Total Value, and if an ad's value is the highest, it wins the impression. But does that mean we are charged the exact bid per impression we set? Not quite. This is because Facebook’s auction operates on a second-price auction model.Second-Price Auction
In this model, the winning bidder doesn’t pay their full bid amount but instead pays just slightly more than the bid of the nearest competitor (e.g., by $0.01). This means that rather than paying the set bid per impression, advertisers only pay the minimum required amount to outperform the next highest bid.Formula for Total Ad Value
Facebook calculates the Total Value of an ad based on the following formula:Bid per Action (where action refers to conversions) × Estimated Action Rate (EAR) + Quality Score
However, in Facebook's official documentation, the Quality Score component is often omitted. This is likely because, at the start of an ad’s run, the Quality Score is not yet established and does not impact auction outcomes.
Thus, the formula simplifies to:
Bid Per Impression = Bid Per Conversion × Estimated Conversion Rate (EAR)
Breaking Down the Components
Bid Per Conversion
This is the exact value we control when setting a Bid Cap—not the Bid Per Impression. This is an important distinction.Estimated Action Rate (EAR)
EAR is Facebook's internal metric that estimates the probability of a conversion occurring from a given impression. It is measured as a percentage and is influenced by multiple factors, including:- Historical performance of your ad and account (e.g., previous conversions).
- User behavior and audience characteristics.
- Context of the ad impression, relevance of the creative, and other parameters.
Calculating BPI and EAR
To determine known values from the formula, let’s analyze:Bid Per Impression (BPI)
With just a few thousand impressions in any given GEO, we can determine the average CPM (Cost Per Thousand Impressions). Since CPM is derived from individual impression costs, we can express it as:CPM = Average BPI × 1000
Thus, solving for BPI:
BPI = CPM / 1000
Estimated Action Rate (EAR)
To estimate EAR, we can break it down further:EAR = CTR × CR
Where:
- CTR (Click-Through Rate) accounts for the transition from impressions to clicks.
- CR (Conversion Rate) represents the transition from clicks to actual conversions.
Final Formula
By substituting these values, we get:CPM / 1000 = Bid Cap × CTR × CR
Or:
Example Calculation
Let’s assume the following:- CPM = $15
- CTR = 3% (0.03)
- CR = 2% (0.02)
Bid Cap = (CPM × 100) / (1000 × CTR × CR)
Bid Cap = (1500 cents) / (1000 × 0.03 × 0.02) = 2500 cents = $25
This means that setting a Bid Cap at $25 ensures we can secure traffic in this GEO efficiently.
Practical Applications of Bid Cap
Using Bid Cap in Testing
We can influence Bid Per Impression through two key levers:- Adjusting the Bid Cap.
- Changing the Creative.
Testing Strategy:
- Start with a Bid Cap based on a 100% ROI target.
- If impressions are low, gradually increase the Bid Cap by 10% increments.
- After each adjustment, wait 2-3 hours before reviewing results.
Scaling with Bid Cap
Once we know the conversion rates of our landing pages and understand the CPM in our GEO, we can optimize ad sets using fresh creatives while maintaining an appropriate Bid Cap. When scaling, the CTR becomes a key metric to track, making performance monitoring simpler.Accelerated Delivery with Bid Cap
One advantage of Bid Cap is that it allows for an accelerated delivery mode. Unlike standard pacing, where Facebook spreads ad spend across 24 hours, accelerated delivery attempts to exhaust the budget as quickly as possible while impressions are available.This feature is useful for:
- Rapid data collection during testing.
- Specific strategies that leverage lower Bid Caps combined with accelerated delivery to optimize spending.
Key Takeaways
- Bid Cap ensures cost control—unlike Cost Per Result, where Facebook optimizes towards an average price, Bid Cap prevents overspending beyond the set limit.
- Ad potential impacts traffic volume—the lower Facebook rates your creative, the fewer impressions you will receive.
- High-quality creatives with strong performance are prime candidates for Bid Cap scaling, especially when initial tests show promising results.
- Avoid frequent Bid Cap adjustments—wait several hours after changing the Bid Cap, especially in accelerated mode, to prevent rapid budget depletion.