How Facebook Ads Work: A First Principles Guide

This first principles guide to how Facebook Ads work first appeared in my newsletter several months ago. It was one of my most popular pieces, so I’m sharing it here.

How do Facebook ads work? Well, you put a dollar into the platform and hope to get more than a dollar out in sales. This is how most digital marketing professionals understand Facebook advertising as a platform. 

But iOS 14 privacy updates have nuked the in-platform analytics and attribution that many marketers depended on to manage their ads. If you invest heavily in this channel, it pays to go a level deeper than the dashboards to understand what’s really going on when you run a Facebook campaign.

To understand how Facebook ads work, first we need to understand the role any type of advertising plays in the path to purchase.

Before we dive in…if you’re looking to build a deeper strategic understanding of digital marketing and eCom, you’ll love my newsletter.

The Three Ways All Advertising Works

We see the results that advertising produces: the sales that result from the dollars we invest. But let’s dig into the human behavior driving those sales. Advertising serves one of three functions:

Advertising Creates Awareness For Potential Customers Who Are Not “In Market”

This is classic brand marketing in its many forms. When you see a billboard advertising a car dealership or local restaurant, you can be sure that only a handful of people driving past are actively thinking about purchasing a new car or going out to eat. But repeat the message often enough (and creatively enough), and consumers will remember the brand when it is time to purchase.

Advertising Captures Demand From Prospects Who Are Already In Market For Your Brand

The best example here is branded SEM: ads you serve when people search for your brand’s name on Google. The prospect has you in mind specifically, and they have high purchase intent. You serve ads to this customer to ward off competitors or to present them with a personalized experience.

Advertising Captures Demand From Prospects Who Are In Market For Something, But Not Aware Of Your Brand

This is how most programmatic advertising works, so it’s also how Facebook ads work. You serve ads to a group of people who have been flagged as having a high intent to shop…for something. It’s unclear if the audience has ever heard of your brand. But it’s your job to craft an ad that will convince them to take up their buying impulse with you.

When performance marketers talk about Facebook prospecting, they’re talking about function #3. The biggest strategic unlock for Facebook marketers: you are not taking consumers from zero to one. Your ads are not generating net new consumer demand at scale. And this puts an upper limit on the total demand you can capture each day.

How Facebook Ads Work: The Mechanics Of A Campaign

You select a campaign objective, a budget, and an audience. You tee up lots of scroll-stopping creative, and then click “launch”. What happens next? I’ll use a “door-to-door sales” metaphor to explain.

Imagine a large, densely populated neighborhood. Some homes and apartments are currently occupied, others are not. So you can estimate the total population within 5-10% accuracy, but that population changes day by day. This represents the entire user base of the Facebook ecosystem.

Because Facebook is the “mayor” of this neighborhood, they know some things about the citizens that others do not–what different citizens are interested in, their demographics, what they are likely to buy. To drum up some municipal revenue, Facebook will hire out door-to-door salespeople to different brands looking to sell their products. This represents buying an ad.

When you, the brand, hire one of these salespeople, you provide some information that will help him or her create a list of citizens most likely to purchase your product. This could be a list of interests, or a list of people who already bought your product. You could also tell the salesperson to canvas the city and use their prior experience to contact the best prospects first. This represents your targeting strategy.

As the brand, you are responsible for crafting the pitch and providing any supporting sales materials. This is your ad creative. You can offer up more than one version of your materials and the salesperson will trial through them until they find the one that seems to work best.

This sales team doesn’t work on commission. They’ll charge you a fee for every door they knock on, whether someone answers or not. So you set a daily budget for the work. Because Facebook is a surveillance state, there is a mutual understanding that this activity will be measured fairly. The stage is now set…your campaign is ready to launch.

So what are you trying to accomplish here? Generate the most conversions for the lowest cost. You want the sales team to knock on doors where the resident is most likely to find your product relevant and desirable, and where the resident is primed to buy.

In some cases, the prospect may buy from you after a single knock. Others may need multiple visits from the salesperson and multiple versions of the pitch. Others may simply find the offer irrelevant and slam the door in your face. Some doors will never open; the home or apartment is vacant.

Mayor Facebook is able to maintain this business because their salespeople are good at learning over time. After a few days, they’ll knock on fewer vacant doors and concentrate their efforts into neighborhoods where the residents are more inclined to buy immediately.

At any given time there is a finite number of citizens who are willing and able to purchase your product on a given day. You don’t know what that number is, and neither does Facebook. As the number of doors you knock on gets closer to the number of potential buyers, it will take an increasing amount of effort (and money) to find each incremental conversion.

This is why understanding the function of Facebook advertising is so important. If you thought your sales team was generating net new demand, you would continue to scale until you were able to canvas the entire city each day.

But in reality, there are two upper limits to your selling efforts: the total number of citizens who have the potential to buy, and the percent of those citizens you can reach at a price you feel is reasonable.

Your job as a marketer is to understand this fact and communicate it to your clients, be they internal or external. Spend enough money and you will reach the point where fishing for in-market prospects becomes unprofitable. You’ll need to invest in other activities that increase overall awareness, or find new ways to sell to your existing base.

Why Advertising On Facebook Gets Harder Each Year

I like the city/traveling salesperson metaphor because it makes the idea of Facebook advertising as an ecosystem more “real”. Our view of the platform is often limited to our own campaigns. But there are some big macro factors that influence how Facebook ads work, and these factors have chipped away at average performance over the years.

Returning to the metaphor–your brand is not the only one bidding for the services of the sales team. The more brands come to the auction, and the more brands targeting your specific audience, the more you’ll need to pay for each door knock.

The “golden age” of Facebook advertising overlapped the “golden age” of venture-backed DTC brands, roughly 2014-2016. During these years there were a small number of advertisers chasing a large number of Facebook users. Competition in the auction was at an all-time low.

I remember working with a “traditional” brand and testing out Facebook prospecting with our agency circa 2015. Our media buying MO was last-click ROAS. No one at our agency, or internally, knew how to interpret Facebook’s attribution modeling. So we dropped the platform (BIG mistake).

But as an increasing number of brands started to “get it”, the Facebook auction became more competitive, driving up prices. First there was the VC-backed DTC gold rush. Then drop-shipping “entrepreneurs”. Then the rush of bootstrapped small businesses launching on Shopify. And then, finally, the laggards: traditional brands like my former employer.

At this point (2018-2020), Facebook advertising was highly competitive but still feasible for many brands. But you needed to nail product/market fit, ad creative, and P&L structure to scale successfully. No more drop-shipping $1 water bottles you found on AliExpress for $10.

Apple’s iOS 14 release presented an additional challenge. This release opts users out of all pixel tracking by default. Because Facebook’s data collection is pixel-based, this means that less data will be collected overall. 

You can read more about why performance has declined and what you can do about it here.

And if you want to think more strategically about performance marketing, you should subscribe to my newsletter.

How Facebook Ads Work And Why It Matters

In an emergency situation, we regress to the level of our training. And that’s why I wrote this piece: to give marketers and operators a view into the full context of our current situation.

An all too common situation: a marketer comes up in a growth environment, but never digs into why their tactics are working. They move on to that next big step in the career ladder, and are confronted with a turnaround situation. And without the right grounding in context and strategy, they fall flat on their faces.

As a marketer, more than half of the factors influencing your success are out of your hands. Unfortunately, those things are difficult to measure. Marketing (especially digital marketing) is easy to measure, making it easy to point fingers.

To thrive in this environment, you need to go beyond tools and tactics and understand the ecosystem you’re working in. If macro trends are impacting your results, you need to communicate them.

And if the folks you work with are impervious to reason, and think it is the job of performance marketing to “make it work” regardless of the inputs, then you need to AVOID THEM.