The ‘Cost per Result’ Misconception Most Beginners Have

(Originally posted 6 January 2020 on LinkedIn)

I was initially apprehensive about posting this article as I felt like what I’ve written may seem trivial. However after conversing with several clients and friends who are not in the performance marketing field, they all had the same misconception of ‘cost per result’. Thus hoping to shed some light, I decided to go ahead with it!

What are ‘Results’

Before understanding what does ‘cost per result’ mean, let’s take a look at what ‘results’ are and aren’t. 

A ‘result’ does not quite equate to specifically a landing page view, a conversion, or a click. It is instead a catch-all term used to refer to the outcome of an ad campaign, whichever that may be. So depending on the objective you’ve set and outcome you’re optimising for, results can refer to conversions, landing page views, link clicks, etc. 

Objective: Traffic Result: Landing page views

Objective: Awareness Result: Impressions

Objective: Conversions Result: Store traffic 

(Also, a conversion does not exclusively refer to a purchase. It is instead also a generic term used to refer to the specific action you want a user to take.)

Misconception on ‘Cost per result’

(In this example, the ‘result’ here refers to a click.)

Misconception: "A cost per click of $1 means I will pay $1 every time someone clicks on my link. If nobody clicks it, I won’t need to pay $1."

On first look, this indeed sounds plausible. After all the term is quite literally ‘cost per click’ - which is how much a click costs. 

However this is a fundamental misconception on the term and potentially the entirety of performance marketing!

Truth about ‘Cost per result’ 

Cost per result = Total amount spent ($) / Total number of results

In this way, you’ll see that the cost per result is derived from the amount spent divided by the number of results were achieved. 

Here’s an example to illustrate:

With the same budget of $10, there are two scenarios -

Scenario A: 1 click

Scenario B: 10 clicks 

In Scenario A, as only 1 click was generated after spending $10, you could think of it as that one click having costed $10. (Cost per result: $10)

In Scenario B, as 10 clicks were generated after spending $10, it can be interpreted as a click having costed $1. (Cost per result: $1)

Keep in mind that this sounds fundamentally different than the misconception mentioned above where you'll pay a certain fixed amount when a result is generated, and not have to pay when nothing happens. This is certainly not the case!

Lowering your cost per result

From the equation of 'Cost per result = Total amount spent ($) / Total number of results' you might have inferred that you'll be able to lower the cost per result by increasing the number of results while maintaining the amount spent.

But how do you do so?

Aha, now that’s the million-dollar question! To answer that, we'll have to look at how Facebook determines the winning ad of an auction.

[Advertiser Bid] x [Estimated Action Rates] + [User Value] = Total Value

Whenever there is an opportunity to show a person an ad, Facebook runs an auction to determine which ad wins and ultimately gets shown. You'll see here that you'll be able to rake up the highest 'Total Value' without increasing your bid if you're able to generate high 'Estimated Action Rates' and 'User Value'.

This article explains more about the ad auction process, but to put it simply across: Facebook has an interest in serving users ads that are of quality and relevance to them as that helps in keeping users on its platform. If you're able to create such ads, they'll be in favour and you'll be able to lower your cost per result.

Creating effective ads depends on so many other factors like the creative, audience, bidding etc. and this is why having a professional take care of your performance marketing channels (like paid social, paid search, display) can make all the difference even with a small budget. 

This process of constantly testing and iterating ads to see what works better is also what makes me continually intrigued and excited about paid social. 

I hope I've managed to clearly explain the meaning of 'cost per result'! If there's one takeaway from this article, let it be this: cost per result is derived from the total amount spent divided by the total number of results achieved.

Cheers!