In the article you're going to learn about the following metrics:

CPC is the dollar amount cost of ad spend needed to earn your ads one single click. Considering that even with a few dollars in ad spend you’re earning multiple clicks, it always makes more sense to calculate CPC as an average and this is how Facebook calculates it as well.

The Formula

Cost-per-Click is calculated by dividing the cost of ad spend by the total number of clicks received. The output is a dollar amount. It looks like this:

Understanding CPC

There’s really no such thing as a “good” CPC. CPC will widely vary by industry because there are different levels of market competition by industry. What this means is that there are specific industries where there are more merchants advertising on Facebook and all of these merchants are simultaneously competing for the same digital ad space and attention, driving ad costs up.

CPC also changes seasonally. During the holiday season, there are more advertisers spending more money on Facebook ads. This increases market competition and drives ad costs up. This means higher CPCs. During months like January and February, you can expect CPCs to go down. This is a double edged sword because more people are looking to shop online during the holidays than in the middle of January. To learn more about market competition and how it impacts ad costs, click here.

When trying to understand your CPC, just remember to put it into context and especially look at how your CPC has changed over time instead of fixating on the current metric itself.

What does CPC tell you?

Once you understand how to look at CPC in context, it’s very useful for knowing how good your ads are compared to the market average. For example, if the industry that you’re in has an average CPC of $1.90 and your CPC is $2.50, then you know that you need to improve the quality of your ads to captivate your audience even more. Alternatively, if your CPC was $1.50, then you know that you need to focus on improving other metrics.

The single largest thing that you can do to improve your CPC is improve the quality and relevance of your ads. One thing to note is that ad quality and ad relevance are not the same thing.

Ad Relevance

How relevant an ad is (ad relevance) depends on how well it connects and resonates with your target audience. If your target customers like your ad or what your ad copy says, they’ll click on your ads at higher rates, increasing your link click rate (sometimes called click-through-rate). The higher your link click rate is, the lower your CPC will be. Facebook rewards ads that their users like with lower costs, allowing you to get more sales for less ad spend!

Improving Ad Relevance

To make your ads more relevant to your audience, you need to consider the content that you’re creating. If your CPC is higher than average in your industry, you need to test a wider variety of ad creatives.

One thing to also consider is that your target demographic has either changed or is different than what you think it should be. Demographic data inside of Facebook isn’t great anymore, so we recommend not relying on that to learn who your customers are. Instead, we recommend using post-purchase surveys and even adding one simple question to your checkout process that allows you to collect a little bit of data about who your customers are. The answers you get might surprise you!

Ad Quality

Ad quality is not the same thing as ad relevance. The quality of an ad is not determined by your customers, it’s determined by Facebook. A high quality ad must meet certain design and wording requirements set by Facebook.

Improving Ad quality

One thing that you can do to make sure that your ad copy and headline are high quality is make sure that you’re not using words that Facebook has banned from being used on their ad platform.

The second thing that you can do to improve ad quality is to follow modern design principles. Facebook has AI that analyzes the ad image or video that you’re using for your ad and gives it a quality score. This score is subjective, but Facebook utilizes it to judge the quality of your ad.

There really isn’t a definitive way to explain how exactly to create an ad that receives a high quality score, because it isn’t black and white. There are many ways to design high quality ads that will score high in Facebook’s quality score, but the best advice that we can give is to do your very best and do some market research. A great tool for doing market research is Facebook’s Ad Library. You can search for your best competitors and see the ads that they’re actively running. Use some of these ads to gauge the level of quality of ads that your largest competitors have achieved and aim to match it or do even better!

CTR is the percentage of people who saw your ad that clicked on it. It is calculated by taking the total number of clicks and dividing it by the total number of impressions (how many times your ad was seen). The output is a percentage.

The Formula

Understanding CTR

Click through rate is another metric that has to be put into context. Like CPC, CTR will vary depending on the industry that you’re in. Certain audiences, who are in the market for different products, click on more ads, more frequently than others. Always make sure to research what the average CTR is in your industry so that you know what the benchmarks are.

What does CTR tell you?

CTR tells you something similar to what CPC tells you: how relevant and high quality your ads are! It tells you if you need to test a wider variety of creative or if your creatives are not resonating well with your target audience. A higher CTR than your industry average tells you that you need to focus on other areas in your funnel to improve your ROAS.

How to improve CTR

Improving CTR is the same process as improving CPC. Please refer to that section above to learn how you can improve both your CPC and your CTR at the same time!

CPA is the cost associated with acquiring a customer. Outside of the Facebook marketing world, many people call this Customer Acquisition Cost or CAC for short.

The formula

CPA is calculated as the total ad spend cost divided by the number of customers acquired.

Understanding CPA

Like many other marketing metrics, CPA will vary depending on the products that you sell. CPAs are generally higher for merchants in more competitive industries where there are more brands running Facebook ads. Just like other metrics, more competition will always drive costs up.

Advanced CPA Formula

An alternative way to calculate CPA is to divide CPC by Conversion Rate.

See the formula below:

Understanding the Advanced CPA Formula

It is extremely important to understand this alternative CPA formula, because it highlights how other metrics impact CPA. Knowing which other metrics go into the CPA equation can help you pinpoint where you need the most improvement in order to achieve a lower CPA.

Some merchants think that high prices = higher CPAs. This isn’t true. Brands with expensive products or high Average Order Values have a huge advantage over competitors because their CPCs will be almost identical and many times so will their conversion rates. This means that a brand with higher AOV than their competitors will have a similar CPA, meaning higher profits!

Conversion Rate Optimization (CRO)

The next way to improve CPA is to increase your conversion rate. This is done in two ways: 1) improving your website and 2) improving your merchandising strategy.

Cost-per-Click

CPC is normally not the metric holding you back from lowering your CPA. More often than not, your conversion rate is the metric that needs the largest improvement. This is because the range between good and bad CPCs is only about 300%, whereas the range between good and bad CVR is sometimes as large as 700%.

Nonetheless, improving CPC will improve CPA. To read the about lowering your CPCs, click here.

Conversion Rate is the percentage of customers who convert. Conversion is just a technical term for “buy.” So, if your conversion rate is 5%, this means that 5% site visitors buy (i.e. if you have 100 site visitors, 5 make a purchase of some kind.)

The Formula

Conversion rate is calculated by dividing the number of visitors who purchased by the total number of website visitors.

However, when it comes to Facebook ads, it’s important to always use the visitor count from your Facebook traffic and the number of conversions associated with your Facebook ads. For the most part, your Facebook CVR will be different from your storewide CVR. To calculate your CVR from your ads, you divide the number of clicks on your ads by the number of sales made from Facebook.

Understanding CVR

Conversion rate is many times misleading when you’re relying on software that does not accurately measure the number of sales made from Facebook ads.

Attribution is something that we’ll discuss at the end of this article, so if you want to skip to that section and read below, please do so.

There is more confusion about this topic than anything else that has to do with Facebook ads right now. Attribution is simply the act of noting that a sale was earned because of a Facebook ad. So one could say, “I have 10 sales attributed to Facebook!”

Why is it confusing?

Facebook does not display accurate sales data to their advertisers. The number of sales that you see inside of Facebook is inaccurate. This means that your ROAS, CPA, and CVR are also all inaccurate because all of those metrics are impacted by the number of sales that you’ve earned.

Why is this happening?

Most people in the United States are using an iPhone (55-65%). With the rise of mobile online shopping, this means that an extremely large percentage of people are making purchases online via an iPhone. In Early 2021, Apple rolled out software updates to their new and existing iPhone models called iOS 14.5.

These updates had a goal of increasing the level of privacy available to iPhone users. After installing the update, users were asked if they would like to opt out of certain forms of tracking done by advertisers like Facebook. This tracking data was essential to being able to determine if a sale made on an iPhone was made from a customer that arrived on a merchant’s site after clicking on a Facebook ad. Recent data shows that 96% of iPhone users opted out of being tracked and their data being shared. Without this tracking, Facebook and their advertisers are in the dark.

What data does Apple share?

If you’ve properly set up Aggregated Event Measurement, then Apple will share estimated sales with Facebook. This data takes 1 to 3 days to come in, so your sales data will always be lagged. There’s no way of knowing whether your data was lagged 12 hours, 50 hours, or all the way up to 3 whole days. Because these are estimates and not true sales data, Facebook is still missing about 30% of your attributed sales. This means that sometimes, because of missing sales data and lag in the reported estimates, at any given time your sales data inside of Facebook can be off by sometimes as much as 50%.

How do I fix this?

The short answer is: you can’t. Not unless you’re using third party software that has more than one way of tracking where sales came from, like Preflect. However, just being aware that your daily attribution data inside of Facebook is inaccurate will help you make better decisions and not rush to conclusions.

Average order value, AOV for short, is exactly like it sounds! It’s the average dollar amount value of the orders your customers place on your website. It’s calculated by dividing your total sales by the number of orders (NOT items sold, because some shopping carts have multiple items in them!) The formula is:

Always remember to make sure that you’re inputting data into the formula that is of the same time frame. If you use total sales for the month, but total orders from the past 14 days, you will not be able to properly calculate AOV.

Here’s an example of AOV:

AOV = $100 / 10 orders = $10 AOV

What’s a good AOV?

AOV will vary between merchants. Some merchants might have an average product price of $10, but an AOV of $50 because people tend to purchase multiple items at the same time. Some merchants might have an average product price of $50 and also have a $50 AOV because no one buys more than one item!

However, there is such a thing as a “good” AOV as it relates to Facebook ads. Merchants with AOV below $30 will always be fighting an uphill battle against ad costs. There are unwritten fixed costs to running ads that drive up CPAs. At a minimum, merchants can expect to see $20 CPAs and above. This means that if you sell a $20 product, you aren’t even breaking even because not all $20 worth of revenue is profit. This is why merchants that sell more expensive products have a large advantage over merchants who don’t. Preflect has found that $50-100 AOV is the sweet spot for success.

How do I improve AOV?

Low AOV can be made up for by having a great CTR, CPC, and CVR. However, there are many ways to improve it. If you’re interested in learning how to improve average order value, click here to read the Preflect Academy article on Merchandising Strategy.

Customer Lifetime Value (or simply Lifetime Value aka LTV) is the total revenue received from a customer during their entire customer lifetime. This means it’s how much they’ve spent with your business in the past and how much they’re going to spend in the future. It’s important to remember that last part, because many people think that LTV only looks backward, but in reality it looks backward and forward!

How to Calculate LTV

There’s no easy way to calculate your LTV. There are some Shopify apps that do it, but if you want to know how to do it by hand, here’s the formula (keep in mind that LTV can go outside of 1 year, but for the purposes of marketing we recommending looking at only 365-day LTV):

This formula looks intimidating, even to us, so let’s do an example:

365-day LTV = (200 orders / 100 customers) X $50 AOV = $100 LTV

Remember, that you can never have more customers than you have orders because each single customer had to have placed at least one order.

Who is LTV important for?

LTV is a metric that’s more important to certain merchants than others. Some merchants have low lifetime value simply because of the products that they sell. For example, how often does someone need to buy a dining room table? Not very often. Some people will buy one and then not another for decades.

Companies that sell consumable products will naturally have stronger lifetime values because their products don’t last forever. When someone buys makeup, they use it, they run out, and then they need to buy more. Understanding your industry's repeat purchase rates (i.e. how many times does an average customer return to buy again) will help you assess how important lifetime value is to your business.

LTV-Adjusted ROAS

This is a term that applies to brands that have a strong LTV component to their business. If your average customer places five orders per year and your AOV is $50, then your 365-day LTV is $250. Knowing this is important when looking at your ROAS.

If this brand’s CPA is $50 then one might think that a 1x ROAS is bad for this brand, but in reality it’s great, because once you factor in their LTV, their adjusted ROAS is actually 5x.

If this is confusing, don’t worry, click here to read more about LTV-Adjusted ROAS and more advanced marketing strategies in the the Preflect Academy article on Advanced Growth Strategies.

ROAS means “Return on Ad Spend”. It is the key metric of Facebook ads. There are many ways to calculate it with many different metrics, so it’s very important to understand ROAS in context and especially the various ways you can improve it.

Basic Formula

In its most basic form, it’s calculated as the total amount of revenue generated divided by the total amount of ad spend spent to earn that revenue:

Example:

ROAS = $100 / $50 = 2.00x ROAS

In this example, we’ve spent $50 on ads to earn $100 in sales, so we’ve doubled our money or in terms of ROAS, we’ve achieved a 2.00x ROAS.

Using the traditional formula might be quicker, but it doesn’t tell you what needs improvement and what doesn’t. The purpose of this formula is to break down other marketing metrics that impact ROAS. Understanding this equation is key to knowing which specific, individual metrics you need to improve upon to increase your ROAS.

In the advanced ROAS formula, you multiply Facebook Conversion Rate by Average Order Value and divide the product by Cost-per-Click.

Example:

(5.5% x $60.00) / $2.00 = 1.65x ROAS

The importance of seeing this breakdown is that it shows you which metrics need the most improvement. In our example here, this merchant has an excellent unique conversion rate (uCVR), an excellent AOV at $60, but their CPC is a little high. If there were to improve their ad creatives and ad copy and lower their CPC to $1.60, let’s see what the result would be on ROAS:

(5.5% x $60.00) / $1.60 = 2.06x ROAS

Analyzing ROAS

When taken out of context, ROAS becomes a meaningless metric. For example, if you’ve ever looked around inside of a Facebook ads account that has multiple campaigns, ad sets, and ads, you might find ads or ad sets that have 10x ROAS, one with 0.15x ROAS, and one with 2.5x ROAS. So, what does this mean? It means that you’re not looking at ROAS in context.

You have to look at the bigger picture, specifically at how much ad spend is going through each of those ads or ad sets. Many merchants might prefer the ad set that’s earning 10x ROAS vs the one that’s earning 2.5x ROAS, but what if, upon further inspection, you learned that the ad set with 10x had only spent $50 in ad spend while the ad set with 2.5x has spent $1,000.

The return of the first ad set may be much higher, but it’s only earned $500 in sales. The ad set with only 2.5x ROAS has earned $2,500 in sales. When considered in context, higher ROAS isn’t always better.

Take a look at this example below and if you need to pause the video here so that you can understand it, go ahead and do that.

Example:

Ad Set 1

Ad Set 2