Facebook Ads: Easiest Way to Scale and Generate More Revenue
Summary
TLDRThis video from Disruptor School, hosted by Charlie, offers a game-changing approach to Facebook advertising. It introduces the concept of 'Profitable Scaling Margin' (PSM), a metric that quantifies the profit per customer and guides ad spend to ensure exponential business growth. The video covers key metrics like Blended CPA, purchase frequency, and LTV, and emphasizes the importance of ad quality, media mix, and cash flow cycles for effective scaling. It also provides actionable strategies for incremental scaling, AB testing, and budget allocation to optimize ad performance and drive sustainable business growth.
Takeaways
- 🚀 Maximize Facebook ad spending by understanding Profitable Scaling Margin (PSM), which is the amount you can spend to acquire each transaction without losing money.
- 🔢 To calculate PSM, know three key metrics: Blended CPA (average cost to acquire a transaction), frequency of purchase, and LTV (lifetime value of customers).
- 📈 PSM is crucial for determining how much more you can spend on ads without breaking even, allowing for exponential business growth.
- 💡 Focus on improving ad quality and relevance to lower CPA and attract better customers, which in turn improves LTV.
- 📊 Understand the media mix and how different channels contribute to your Blended CPA, as not every transaction costs the same.
- 📈 Incremental scaling is more effective than big moves; small, consistent increases in budget can lead to dramatic changes over time.
- 📉 Monitor and optimize Blended CPA by focusing on more profitable channels like search or email to reduce the overall cost per transaction.
- 💸 Cash flow cycle is important; knowing the time between purchases can help in reinvesting profits more frequently for greater returns.
- 📝 AB testing should be focused on improving landing pages and conversion rates rather than testing ads or targeting if PSM is already good.
- 🎯 Prioritize budget allocation to channels with the highest return and untapped potential to reduce Blended CPA effectively.
- 📈 Building a better business is key to improving PSM; good businesses naturally scale out accounts rather than the other way around.
Q & A
What is the main focus of the video by Charlie from Disruptor School?
-The main focus is on revealing proven strategies to maximize the power of every dollar spent on Facebook ads through understanding and weaponizing profitable scaling margins.
What is meant by 'profitable scaling margin' in the context of Facebook ads?
-Profitable scaling margin refers to the amount of money made off of every customer, which is directly related to real unit economics, and it helps determine the margin of profit available for scaling into.
What are the three numbers crucial for understanding profitable scaling margin?
-The three numbers are Blended CPA (the cost to acquire a transaction across all marketing efforts), frequency of purchase or cash flow cycles (how often the average person buys from you and the time between purchases), and LTV (lifetime value of customers).
How is the frequency of purchase or cash flow cycles calculated?
-The frequency of purchase or cash flow cycles is calculated by determining how many times the average person buys from you and the time in between those purchases.
Why is understanding LTV important for scaling Facebook ads?
-Understanding LTV (lifetime value of customers) is important because it helps to know how much money each customer is worth, which is crucial for determining the profitability of scaling ad budgets.
What is the significance of knowing the customer's first purchase LTV?
-Knowing the LTV of a customer's first purchase is significant as it is the single most predictive data point in the customer journey and helps in making informed decisions about scaling ad budgets.
How does ad quality and relevance affect the CPA and LTV?
-Ad quality and relevance are crucial because poor ads can lead to a higher CPA and attracting the wrong customers can negatively impact LTV.
Why is it important to consider media mix when scaling Facebook ads?
-Considering media mix is important because not all transactions cost the same, and understanding the different channels through which customers engage with the brand helps in optimizing the overall CPA.
What is the recommended approach for scaling ad budgets effectively?
-The recommended approach is incremental scaling, where small, consistent increases in budget over time can lead to significant growth rather than making large, infrequent changes.
Why is it suggested to focus on improving conversion rates and offers rather than AB testing ads when PSM is good?
-When PSM is good enough to raise the budget, AB testing ads or targeting might disrupt the current success. Instead, focus on improving landing pages and offers to increase conversion rates and overall profitability.
How does understanding the cash flow cycle impact the strategy for scaling Facebook ads?
-Understanding the cash flow cycle helps in determining how long it takes for a customer to make a repeat purchase, which is crucial for reinvesting profits and scaling the business exponentially.
What is the role of monitoring and analysis in maintaining a profitable scaling margin?
-Monitoring and analysis play a critical role in maintaining a profitable scaling margin by regularly checking the numbers and making necessary adjustments to ensure the business continues to scale profitably.
Outlines
📈 Profitable Scaling Margins & Maximizing Ad Spend
The first paragraph introduces the concept of profitable scaling margins (PSM) as a method to understand the return on investment for every customer acquisition. It emphasizes the importance of knowing how much more can be spent on acquiring each transaction without breaking even. Key metrics such as Blended CPA, frequency of purchase, and LTV are highlighted as essential for calculating PSM. The speaker, Charlie, uses an example to illustrate how these numbers interact to determine the potential for increasing ad spend without incurring losses. The paragraph also touches on the importance of ad quality, media mix, and the stability of the Blended CPA for effective marketing strategies.
🚀 Incremental Scaling and the Power of AB Testing
The second paragraph delves into the practical application of PSM for scaling a business profitably. It suggests incremental scaling through small, consistent adjustments to the budget, which can lead to dramatic changes over time. The focus is on the ability to increase budget based on a positive PSM, and the importance of making decisions that improve PSM. The paragraph warns against AB testing ads or targeting when the PSM is favorable, instead advocating for testing landing pages to improve conversion rates. It also discusses the significance of focusing on offers that yield the best PSM and the potential impact of increasing the frequency of second purchases. The speaker emphasizes building a better business as the ultimate way to improve PSM and the importance of budget allocation to leverage untapped potential for reducing the Blended CPA.
Mindmap
Keywords
💡Profitable Scaling Margin
💡Blended CPA
💡Frequency of Purchase
💡LTV (Lifetime Value)
💡Ad Quality and Relevance
💡Media Mix
💡Incremental Scaling
💡AB Testing
💡Budget Allocation
💡Cash Flow Cycle
💡Customer Journey
Highlights
Facebook ads can cover costs and generate exponential profits, driving business growth.
The video reveals strategies for maximizing the power of every dollar spent on Facebook ads.
Profitable scaling margin is about understanding how much money is made off of every customer.
Profitable scaling margin is not the same as return on ad spend (ROAS).
Three essential numbers for understanding profitable scaling margin: Blended CPA, frequency of purchase, and LTV.
Blended CPA is the cost to acquire a transaction across the entire business.
Frequency of purchase and cash flow cycles are crucial for understanding customer behavior.
LTV is the lifetime value of customers and a predictive data point in the customer journey.
An example calculation of PSM using hypothetical numbers demonstrates its importance in scaling.
AD quality and relevance are key factors in achieving a good CPA and LTV.
Media mix is important; Facebook is not the only channel for customer acquisition.
Understanding the unit cost for all transactions, Blended CPA, is vital for scaling.
Incremental scaling and compounding small moves over time can lead to dramatic changes.
AB testing should focus on improving conversion rates rather than front-end funnel elements.
Building a better business is key to improving PSM and scaling out accounts.
Budget allocation should prioritize spending money where it's best spent and finding untapped potential.
Monitoring and analyzing PSM regularly is crucial for understanding allowable margins and scaling potential.
Reducing CAC while improving Aov and LTB is a focus of another video, offering further insights into scaling.
Transcripts
picture this your Facebook ads not only
cover their costs but generate
exponential profits driving your
business to incredible growth if you're
tired of seeing your budgets vanish with
little return or feeling the pressure to
prove your agency's worth this video is
for you we're revealing the proven
strategies to weaponize profitable
scaling margins so that you can maximize
the power of every dollar you spend on
Facebook ads I'm Charlie welcome back to
disruptor school where we do things a
little bit differently we're focusing on
more sick success and less stress we're
here to help you scale your business and
empower the community elevating the
market to see through their BS let's
dive in so let's start by understanding
profitable scaling margin so profitable
scaling margin is actually letting you
know how much money do you make off of
every customer this is not like Raz
where it's a return on your ad spend
based on attribution for money you spent
today and revenue you got that has to do
with a whole bunch of other things that
have nothing to do with the ad you're
actually this has everything to do with
actual real unit economics to let you
know how much more money could you spend
to acquire every transaction which
ultimately lets you know what is the
margin of profit you have to scale into
so in order to understand profitable
scaling margin there are three numbers
you absolutely must know first Blended
CPA how much does it cost across your
entire business to acquire a transaction
we're going to bake in all marketing
efforts retention subscriptions Google
Tik Tok Facebook everything money out
number of transactions that are coming
in that is fundamentally important so
the second number we need to understand
is frequency of purchase or cash flow
Cycles roughly how many times does the
average person buy from you and what's
the time in between those purchases and
lastly we need to understand LTV what is
the lifetime value of these customers
because ultimately we need to understand
how much money every customer is worth
and bonus point points if you do this
against each individual product that
somebody buys when it's their first
purchase with your business this number
is the single most predictive data point
in your customer Journey so here's an
example of some hypothetical numbers
let's say the LTV of a customer is $200
and CPA plus cogs is like 40 bucks and
the average person buys two and a half
times well our PSM would be two that's
200 LTV divided by 40 * 2 and a half so
what this means is we could pay twice as
much our CPA could be twice as high
before we break even this is incredibly
important because it gets us down to the
world's most important question when it
comes to digital marketing can I spend
more so there are a couple factors we
need to really take into account when
understanding profitable scaling margin
and the first one of course is AD
quality and relevance if you have bad
ads it's going to be hard to get a good
CPA and if you attract bad customers
it's going to be hard to get a good LTD
the second thing we need to understand
is media mix Facebook is by no means the
only Channel we have people that buy
from us just talk to other people on the
street we also have email probably SMS
going we might have Google search or Tik
Tok there's a bunch of different ways
that people can embrace our brand and to
be fair they might just buy from us and
then go back to the website and buy
again not every transaction costs the
same amount and we need to understand
that really it's not about how much does
each individual transaction cost it's
what is the unit cost for all
transactions that is Blended CPA and the
easiest way to find that is total money
spent divided by total number of
transactions and that number is actually
really really stable week over week or
at least it should be I can't tell you
how many times we've worked with Brands
where we've doubled their budget every
30 days but they never touch Google
search and they never improve their
email and they worried about their
Blended CPA going up and up and up but
if you actually spend more time
optimizing and spending more those far
more profitable channels like search or
Amazon or even just refining your email
flows your Blended CPA will come down
because the volume of transactions in
the business go up even though your ad
spend doesn't move nearly as much the
last part that we need to understand and
this is something that nobody else is
talking about is cash flow cycle
everybody's pushing for day one
profitability but how long does it take
for somebody that buys from you the
first time to buy from you a second time
is it 60 days is it 90 days is it 180
days do they never buy from you ever
again if we know we're going to make a
$100 profit over 18 months that's great
but I'd rather potentially make a $30
profit over 45 days because I can
reinvest that money and run it six times
6 * 30 is 180 that's nearly twice as
much profit plus I'm going to be getting
more and more customers with all that so
it actually grows exponentially so now
that we know our profitable scaling
margin how do we scale profitably right
well the first thing we need to know is
scale doesn't happen big moves we want
to look at incremental scaling and small
moves compound over time and can make
dramatic changes remember the most
important question is can I spend more
can I increase my budget and the only
way to really know that is is your PSM
above Target are you doing better than
you could can you be less efficient to
get more volume and if the answer is yes
then we can raise our budget now instead
of doing 20% 50% 100% changes what if
you did
5% 5% Monday Wednesday and Friday three
times a week will double your budget
every month if you double your budget
every month that'll give you a 37 times
greater budget by the end of the year
can you handle 37 times greater budget
probably not if you can say yes more
often than you say no then you're going
to scale the business and now every
decision in your business and in your
marketing comes down to a simple
question what is the impact on PSM
can I always say yes when it comes time
to increase my budget and if the answer
is yes you don't have any other problems
to solve and if the answer is no you'll
probably know that a week or two in
advance so let's talk about AB testing
real quick cuz it's incredibly important
but most people actually wildly misal
this if your PSM is good enough to raise
your budget the worst thing you could do
is actually AB test your ads or your
targeting or anything at the front end
of your funnel instead you should be AB
testing your landing pages to improve
conversion rate you should honestly also
be getting rid of some of your offers
focus on the PSM that is best for your
business and remember if you can get the
average second purchase rate to go from
5% to 10 you can afford a CPA
exponentially higher than you can right
now that change is also a lot stickier
customer Journeys after buying a single
product don't change that much over time
but your ad could die tomorrow the way
you improve PSM is by Building A Better
Business and ultimately good businesses
scale out accounts it's not the other
way around despite what all the
performance marketers and costat Pros
will tell you and the last thing here is
obviously budget allocation we talked
about it before but spend the money
where the money is best spent and look
for untapped potential remember if
you've doubled your Facebook budget over
the last 30 days just by you know adding
5% three times a week but you haven't
touched your search the easiest way to
reduce your Blended SE CPA is just
adding more money where the return is a
lot better if you can add more budget to
search and it brings down your Blended
CPA the worst thing you could do is
touch your Facebook ad so the most
important thing is understand where we
have unleveraged potential and make
changes where they are stickiest and
this happens longer in the customer
Journey I.E second third purchase can we
get those people to spend a little bit
more money can they buy a second time a
little bit more often and where are we
more efficient lower in the funnel can
we spend a little bit more money on the
platforms that live there so the last
thing we need to understand is
monitoring this stuff and doing analysis
the honest truth is these numbers don't
change that often if you were to run
this analysis once a month that's
perfectly fine what you need to know
more than anything is what is my
allowable PSM and understand that when
you improve your volume you don't need
as high a margin on every transaction 1%
of a million is a lot more than 90% of
$100 so now that we know what a
profitable scaling margin is let's dive
into how to build offers that scale and
I made this video right here just for
that this is how you can understand how
to reduce CAC while improving aov and
LTB and it's super easy and nobody else
is talking about it so check it out
until next time I'll see you on the
internet bye
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