Facebook Ads: Easiest Way to Scale and Generate More Revenue

Summary

This 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

00:00

📈 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.

05:01

🚀 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.

Keywords

💡Profitable Scaling Margin

Profitable Scaling Margin (PSM) is a financial metric that indicates how much more money can be spent to acquire each transaction without affecting profitability. It's central to the video's theme as it helps businesses understand their potential for growth through advertising. In the script, PSM is calculated using the formula: LTV (Lifetime Value) divided by the product of CPA (Cost Per Acquisition) and the frequency of purchase. It's used to determine how much a business can afford to spend on ads to remain profitable.

💡Blended CPA

Blended CPA, or Cost Per Acquisition, is the average cost across all marketing channels to acquire a single transaction. It's a key concept in the video because it helps businesses assess the overall efficiency of their marketing spend. The script mentions that this includes all marketing efforts, such as Facebook, Google, and email, and is crucial for understanding the unit cost of transactions.

💡Frequency of Purchase

Frequency of Purchase refers to how often a customer makes a purchase from a business. It's significant in the video as it impacts the calculation of PSM and understanding customer behavior over time. The script uses it to illustrate the cash flow cycles and the importance of knowing the average time between purchases.

💡LTV (Lifetime Value)

LTV, or Lifetime Value, is the total worth of a customer to a business over the entire duration of their relationship. It's a critical concept in the video as it represents the total revenue a business can expect from one customer. The script emphasizes that understanding LTV is essential for calculating PSM and making informed marketing decisions.

💡Ad Quality and Relevance

Ad Quality and Relevance pertain to the effectiveness and appropriateness of advertising content. In the video, it's highlighted as a factor that influences CPA and LTV. High-quality, relevant ads can attract better customers and lead to lower acquisition costs and higher lifetime values.

💡Media Mix

Media Mix refers to the combination of different advertising channels used to reach customers. The video discusses the importance of not relying solely on Facebook but also considering other channels like Google search or email. A balanced media mix can lead to a more efficient Blended CPA.

💡Incremental Scaling

Incremental Scaling is the process of gradually increasing the scale of operations or marketing efforts. The video emphasizes the importance of making small, consistent adjustments to budgets and strategies to achieve sustainable growth. It contrasts with making large, risky changes.

💡AB Testing

AB Testing, also known as split testing, is a method of comparing two versions of an ad or webpage to see which performs better. The video advises against AB testing ads or targeting if the PSM is already good, instead suggesting to focus on improving landing pages and offers to enhance conversion rates.

💡Budget Allocation

Budget Allocation is the strategic distribution of funds across different marketing channels or campaigns. The video stresses the importance of allocating budgets where they will yield the best return, such as search advertising, to reduce the Blended CPA and improve PSM.

💡Cash Flow Cycle

Cash Flow Cycle is the time it takes for a business to receive cash from a customer and then reinvest that cash to generate more revenue. The video discusses the importance of understanding this cycle to maximize profitability and the potential for exponential growth through reinvestment.

💡Customer Journey

Customer Journey refers to the path a customer takes from initial awareness to making a purchase and potentially becoming a repeat customer. The video mentions the importance of understanding this journey, especially in relation to improving second and third purchases, as a way to enhance PSM and business growth.

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