All posts tagged Facebook ad costs rising

I get asked this a lot and I think I have an answer. With Facebook, you can pass your revenue data through to them so that they can calculate your ROI and ROAS, (return on investment and return on ad spend). Wonderful right? You can login to your Facebook ads account and see instantly if you’re profitable! It’s so convenient. Everything is one place so you can see it. It’s also the dumbest thing you can do. This meme says it all nicely:

Think about it.

Ever since Facebook introduced this ability for store owners and anyone else to report their revenue to them, they’ve been collecting revenue data on all of us.  Now they have so much that they know what our profit margins are.  (We told them because we are all stupid).  Now they raised the cost of ads knowing that we would still run our ads.

Here’s an example:

You have a Shopify store that sells hoodies.  Say you sell it at $39.95, the base cost you pay to your supplier is $17.95.  Now you run some Facebook ads to your product page that sells the hoodie.  Say it costs you $15 in Facebook ad spend to get 1 sale.  Your net profit is now $39.95 – $17.95 – $15 = $7.  In your store, you’ve set the pixel properly on your thank you page, (the page they see after buying and checkout is complete).  You report your revenue to Facebook as $39.95, (if you use print on demand platforms they include the shipping cost as part of your revenue which inflates this revenue number even more!).  So Facebook sees you made $39.95 per sale and only paid $15 to get it.

Quickly let’s talk about ROAS and how it’s calculated:

Return on Advertising Spend (ROAS) is the amount of revenue a company receives for every dollar spent on an advertising source. This is a gauge of the effectiveness of online advertising campaigns. The higher your return, the more effective the ad source.

ROAS = (Revenue derived from ad source)/(Cost of ad source)

So in our case:

ROAS = $39.95 / $15

ROAS = 2.7

So Facebook thinks we are making an ROAS of 2.7.  They think the campaign is doing awesome for us.  They think we’re super happy and profiting nicely.  So what can they do to us?

They can and did raise ad costs.

Every time you report your revenue to Facebook you are contributing to the problem of rising ad costs.

Facebook is supplying traffic.  They are a traffic source.  They do NOT need to know what we make on that traffic source.  If you hand them that information, you’re handing them a loaded gun that they can and will pistol whip you with.

Facebook can and has adjusted the cost of traffic upwards.  They did it because they know what we make.  This isn’t just ecommerce or print on demand but every industry that reports revenue to them.

In my training, I refuse to pass along the revenue to the supplier of my ads.  They don’t need to know what I’m making per sale.  That information does not do anything except allow them to increase my ad costs.

Can you imagine going to fill up your car and asking the gas station what they paid for gas?  They would look at you like you’re insane.

Can you imagine going to Mcdonalds and buying a Big Mac and asking them what their costs were for the Big Mac?  They would look at you like you’re from Mars.

Yet Facebook asks us what our revenue is and we happily report it to them!  So stupid.  I always knew it was a dumb idea ever since it first came out but now it’s confirmed.  IF you have been passing revenue onto Facebook and are now wondering why ad costs are up, you’ve got your answer.

So what’s next?

What can we do to counter this?

I think the damage has been done.  I think they’ve got enough revenue data now in every niche and market that even if we all stopped reporting our revenue to them, they could still go on historical data.  We shot ourselves in the foot by passing revenue data onto them.  The supplier of traffic does not need this information and should NEVER have been given it.

That’s my theory and I’m sticking to it.