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I hear it every day — “But how much money will we make from the Facebook ads?”

The common wisdom is often “Well, you can’t really calculate ROI from social media directly.”

Hogwash. We do it all the time. And I’m going to share our formula with you now.

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First, we start with the costs side — this is usually just what you’re spending on the ads (and, if you’re working with an agency, their costs to prepare the ad, get it deployed, and manage the bid rate as the campaign runs).

One we have that, we move onto the revenue estimates.

Step 1: REACH:

The critical metric for calculating your ROI is “reach” — in other words, how many people will our campaign be seen by. All other calculations fall out of that. While reach does vary seasonally and based on how much competition is in the ad market, we start with the rough assumption that you will reach 1,000 people for every $20 of media spend. So if you are giving Facebook $750, you can expect to reach roughly 37,500.

Now, we move onto the two important actions — click-through rate and the conversion rate.

Step 2: CLICK-THROUGH:

For forecasting, we assume a 1% click-through rate (CTR) — that means that for every 100 people who see the ad, one person will click it. While we usually get a much higher CTR rate for our clients, we deliberaely start with a low number to forecast conservatively. You can increase your CTR by first deploying several low-budget ($300-$500) campaigns that test a variety of messaging, audience targeting groups, and bid strategies, then run larger budgets against the groups that are generating higher CTR.

Step 3: CONVERSION:

The second number, conversion rate, defines how many people who click the ad go on to buy something. This number depends entirely on what you’re selling. If it’s a low-price and easy-to-buy product (like a downloadable e-book), you might get a 25% conversion rate or higher. If it’s a higher-end product (say, legal services or life insurance), you could expect lower.

One note on conversions: Not every conversion can be tracked directly online. If you’re selling new condos, nobody is going to pay for one online with their credit card. In this case, your conversion event will be booking a tour, or requesting a call from a sales rep. In those cases, you’ll have one more conversion to consider: lead to actual sale.

Let’s assume you’re selling life insurance. You get $850 a year in revenue from each client. With that $750 media spend, we know we’ll reach about 37,500 people. If only 1% of those people click the ad, we now have a pool of 375 people. Then, if we know from past experience that we close 15% of people who visit our web site, we’ll have about 56 customers at the end of that process. 56 people times $850 in revenue is $47,600.

The Final Step

Then, we bring costs back into the equation. There’s the $750 we spent on the ads, and say $3,000 for an agency to design, set up, and deploy the campaign. Our costs are $3,750.

Finally, we simply divide our costs ($3,750) into our projected revenue ($47,600) and we have an ROI of 12.6x — in simpler terms, for every $100 we invested into Facebook ads, we can expect to generate about $1,260 in revenue.

This is the ROI forecasting process we use with clients every day, and it works.

It’s important to remember that industry averages change over time, so some of those numbers (notably, CPM — how many people you’ll reach for the money spent) may need to be adjusted.

But anyone who tells you that you can’t estimate ROI on Facebook ads simply hasn’t done the work.

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