How Ad Auction Winners are Determined

Use this lesson to:

  • Summarize how an ad makes it from the ad auction to people.
  • Explain how Facebook calculates an ad’s Total Value.
  • Explain why user value and relevance are important to an ad’s performance.
  • Discuss considerations that may help achieve better user value scores.

Mutual value for people and advertisers

Whenever there’s an opportunity to show someone an ad, we run an auction to determine how to deliver the most value to them and to you, the advertiser.

Showing people high-quality, relevant ads makes them more willing to engage with advertisers in the future. Across the Facebook Products, we aim to optimize people’s experiences by matching them with the ads that are most relevant to them. When your ad has a high user value, it means your ad is relevant to your target audience, which helps boost its Total Value ranking in the ad auction.

An ad’s journey to the top

Let’s explore how the ad auction works from the perspective of someone who uses Facebook frequently.

Sally is a 25-year-old woman who lives in Washington.

Every morning, Sally opens Facebook to see what’s new with her friends and family. As she scrolls through her News Feed, advertisers compete to show her their ads.

1. The competition begins

Thousands of advertisers want to show ads to people like Sally: women who are 25, who live in Washington and so on.

2. We consider the bids

Facebook holds auctions that consider each advertisers’ bids for an opportunity to serve an ad impression to someone like Sally. We also consider how interesting and relevant we think Sally will find each ad, and how likely it is she’ll take an action such as clicking or making a purchase after seeing the ad.

3. We choose a winner

Based on these considerations, Facebook determines which advertiser wins this auction.

4. What Sally sees

Facebook shows Sally the winning ad in her News Feed.

A similar process happens each time a person on Facebook sees an ad. The ad auction works the same way for ads that appear across Facebook Products.

Maximize user value

When your ad enters the Facebook ad auction, it competes with other ads aimed at people in your target audience. As with all content on Facebook, Instagram, Messenger and Audience Network, we want to make sure we show the right content, including ads, to the right person at the right time. We try to optimize each person’s experience by showing them content we think they’ll find interesting and helpful. Because we also limit the number of ads people see in their News Feed, you’ll compete against other advertisers for a limited number of slots.

gif of woman surrounded by ads

At the same time, we strive to show your ads to the people we believe will be most valuable to you.

​Let’s consider an example:​

Jasper’s Market sells flowers. Cafe Escape is a restaurant. They compete with other businesses to show their ads to similar audiences in the weeks before Valentine’s Day.

Sally is in the target audience for ads set up by Jasper’s Market and Cafe Escape. She picks up her phone, scrolls through her Facebook News Feed and has the opportunity to see an ad. Advertisers, including Jasper’s Market and Cafe Escape, compete for that spot through the ad auction. Our auction determines which ad Sally sees and how much the winning advertiser pays to show it to her.

How we determine which ad wins:

The formula that determines the winning ad in an auction is written as:

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

Our auction ranks each eligible ad by its Total Value, and the ad with the highest Total Value wins. Total Value is a numeric value we calculate using several factors. They include the bid you submitted when you set up your ad, our predictions about how the people in your audience will react to your ad and how relevant we think they’ll find your ad.

User value and relevance

User value considers relevance and ad quality. The more relevant your ad is to your audience, the more competitive it’s likely to be in ad auctions. Also, the more relevant we predict an ad will be to a person, the less it may cost the advertiser to show it to them, all other things being equal. Signals for user value come from how people interact with organic and paid content, as well as ad quality and post-click experience.

Note: Facebook considers user value, not relevance score in Total Value calculation.

Click on each area to learn more.

Relevance score

Although relevance is not considered directly in Total Value calculation, it is an important user value indicator. We assign your ad a relevance score, which estimates how well your ad is resonating with the people you want to reach. The higher your ad’s relevance score, the better it’s considered to be performing. The score ranges from 1 to 10. A 1 indicates low relevance and 10 indicates high relevance. We show a relevance score after your ad receives more than 500 impressions.

We base relevance scores on several factors, including:

  • How well your ad is performing
  • Positive feedback (for example, app installs, clicks, video views) we expect from people who see your ad
  • Negative feedback (for example, if someone clicks “I don’t want to see this” on your ad)

User value considerations

User value can sometimes be difficult to predict because inputs are dynamic and always changing. Our goal is to deliver the best possible experience for our community. For this reason, ads that link to web pages with poor user experience will likely carry low user value. But what makes a poor user experience?

Here are a few things to remember to achieve the best user value:

Maximize advertiser value

Advertiser bid

You tell us your cost goals with your bid strategy, and we bid for you to help you meet that goal. This may include a bid cap (for the lowest cost bid strategy) or cost target (for the target cost bid strategy) to guide our bidding.

Estimated action rates

Each ad has an optimization event, often an action you want a person to take, such as clicking to a website or installing an app. Estimated action rates represent how likely we think someone is to take that action.

We base our estimates on the person’s previous actions and your ad’s historical performance data. This helps us deliver your ads to the people most likely to give you the result you care about.

Regardless of which action you choose to optimize for, we convert all advertiser values to an estimated CPM (eCPM) to allow us to rank ads with different optimization goals and bids. CPM is cost per thousand impressions: the total amount spent on an ad campaign, divided by impressions, multiplied by 1,000.

Ad quality

We determine how interested we think a person will be in your ad through measures of its overall quality and specific relevance. For example, if your ad has received a lot of negative feedback, its Total Value may decrease. If a person has a history of interest in what you’re advertising, your ad’s Total Value can increase.

To see how people are reacting to your ad, check its relevance score.

Pricing

The more relevant we predict an ad will be to a person, the less it can cost the advertiser to show the ad to that person, all other things being equal.

After your ads win auctions based on their Total Value, the prices paid are based on the Total Value of the advertisers below you. When the price on the bids is based on those of the advertisers below you, it make it easier to find the bid that will deliver the best results.

How you get charged

Your advertising goal will also help determine your bid strategy. Whether you want to focus on getting impressions, clicks, or conversions on your ads will largely be determined on where your goal falls in the marketing funnel: be it awareness, consideration, or conversion. Here are a few examples of each in relation to Jasper’s Market and Cafe Escape.

A closer look at estimated CPM (eCPM)

This section is optional because you don’t need to be an expert in eCPM to compete in our ad auctions.

We sometimes get questions from advertisers on whether bidding for one type of optimization goal means they have to raise their bid to be competitive against another type of optimization. The short answer is no. This is because Facebook converts all bids to an estimated CPM (eCPM) so that we can compare ads with different optimization goals. If Total Values are equal after accounting for advertiser value and user value, the ads will be equally competitive. We present an example below.

How is eCPM calculated?

Let’s walk through the eCPM formulas for different optimization goals.

eCPM for ranking similar ads

To illustrate the concept above, let’s walk through an example of three ads with equal estimated action rates, but optimized for different outcomes. Ad 1 is optimized for impressions, Ad 2 is optimized for clicks and Ad 3 is optimized for conversions. As the table shows, all bids are standardized to an effective CPM (eCPM) bid, and they’re ready to be ranked once we factor in their user value.

Note that eCTR is shorthand for estimated clickthrough rate, and eCVR is the estimated conversion rate. You can also think of eCTR as the estimated probability of clicks and eCVR as the estimated probability of the conversion action following a click.

Bid Outcome eCTR eCVR Per 1,000 impressions served eCPM
Ad 1 $10 per 1,000 impressions x 1 equals $10
Ad 2 $1 per One (1) click x 1% x 1,000 equals $10
Ad 3 $100 per One (1) conversion x 1% x 1% x 1,000 equals $10

Knowledge check

Key takeaways

  • Auctions determine how to deliver the most value to people and advertisers.
  • Ads that win the auctions are those considered to have the highest Total Value.
  • Ad relevance factors into user value, which further contributes to Total Value.
  • To improve your ad’s performance, make sure it’s relevant and provides a good user experience after someone clicks.

Keep learning

Check out these resources to continue growing your skills.

 

 

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