For ease of understanding, let's take a simple campaign type. A lead-gen campaign optimized for lead conversion.

These are campaign settings.

- The campaign has an open targeting.

- There is no constraint on placement, audience, and Ad set-level budget. In short, it is a full Advantage+ campaign.

- The campaign is optimized for the 'submit form' event.

- No bid cap is provided currently, i.e., the campaign is in 'Maximize conversion' optimization.

- And the daily budget(set) was large enough to reach 20% of the potential audience in a month.

Once you start, the campaign will go through three phases.

Phase One - Learning

In phase 1, the Engine will check your site and start showing ads to a small number of users who are interested in your offering.

More information on the landing page helps here. Let's assume the following results in the first phase.

• Ads are shown to 100 people.

• 25 people clicked on the ad.

• 20 people visited the website (Landing page).

• 4 people converted into lead.

Now, the engine will check those four people and try to reach similar types of people.

For all practical purposes, we can assume that the engine creates a lookalike audience of the convertors

Initially, it will be smaller in size, comparable to the 1% lookalike we create manually, and start showing add to them.

Now, phase 2.

Phase Two - Expansion

In this phase, it does three things in a loop.

- Exhaust the lookalike as long as the lead conversion rate is good

- Keep creating the lookalike of the convertors

- Go back to step 1

Phase 2 in detail.  

Let's assume in the 2nd iteration, it shows the ad to 100 people again.

More people may click on ads in this iteration because the engine is showing ads to people who are similar to converted users.

Hence, we might see better CTR and a higher conversion rate.

An important thing to note here is if the category we operate in has high active competition, i.e., many brands from the category are spending money on potential users, there will be a higher number of users in the 'Close to the Purchase bucket.'

In Google Ads terms, these users are called in-market audiences, and they are in the market to purchase in this category.

While it is good to have active competition, initially, it will act as a deterrent as your campaign scales to a certain level.

However, the brand recall will be very low in the active competition scenario.

You would have certainly experienced this. You see a relevant ad from a brand based on your needs.

When you click on one of those ads (say on running shoes), you will start getting ads from all the brands that are running performance ads on running shoes one after the other.

These ads increase your desire to purchase, not necessarily from one particular brand.

In addition, active competition becomes an even bigger problem as the campaign scales up because of higher auction pressure.

Now, the last phase.

Phase Three - Exhaustion

Phase 3 starts when the engine exhausts most of the in-market audience.

It moves in two directions from there

- To the top of the funnel user in the same category

- To the converting users in the other categories

In the earlier one, the engine will start showing to the users who will visit the website and spend time without necessarily purchasing anything.

In the latter one, the engine will start showing to the users who have purchased somewhere else, not necessarily in-market for the category you are targeting.

These actions won't hamper the campaign spending level but will bring down the campaign performance considerably.

Your conversion rate will start dropping, and hence, your CPA will increase.If we haven't set any cost cap in the campaign,  the performance drop will be drastic.

In this phase, if you have set a cost per lead cap, it will stop spending the full budget.

The most common hack Digital marketers do at this stage is to reset the campaign. This basically means pausing this campaign and starting a new campaign with the same campaign settings.

This way, the campaign will go back to phase 1 and continue the process.

Closing note

Three critical points you should note and one important disclaimer to understand here.

1. Having a bid cap will help you extend the campaign life but make the campaign scale slower in the initial phase.

2. You get what you optimize for. For example,

1.  if you are optimizing the campaign for clicks, the engine will start showing ads to click-lookalike users.

2.  If you are optimizing for landing page visits, the engine will start showing ads to landing page visitor lookalikes, and so on and so forth.

3. None of this happens smoothly. Phase changes can happen in a day or in hours. If you open any 'Facebook Ads communities, you will see a lot of people complaining about campaign performance dropping suddenly. Now you understand the reasons.

Disclaimer:

I have simplified many things in this post to explain how Facebook ad targeting works. Also, there is no open official document about it.

I learned this while spending more than $100Mn on Facebook Ads in the last 10 years for multiple brands. While there could be a few exceptions in how the engine scales, this is the most common scenario across all the campaigns and all the geography.