Facebook uses three different kinds of audiences, and it is good to understand what distinguishes them from each other.
This is an audience created based on specific interactions people have had with your business. For example: visiting or making a purchase on your website, Liking your Facebook Page, launching your app, etc. A Custom audience needs to have at least 100 people in the group to be created. They are usually a good starting point if a business has interacted with customers in the past (e.g. has a list of Leads or Purchasers). The image below shows the different interactions that you can base a Custom audience on.
This is an audience created based on a certain Custom Audience. The Lookalike audience has the general characteristics (i.e. demographics, interests, behaviors, etc.) of the Custom audience it is based on. Facebook, using its proprietary algorithms, returns an audience composed of people that it thinks are similar to your Custom audience. Use this to get a larger audience set for targeting. Note: Lookalike audience creation takes about 20 minutes to populate. It’s recommended to do 1% or 2% Lookalike audiences. Audience size ranges from 1% to 10% of the total population of the countries you choose, with 1% being those who most closely match your source.
This uses manual targeting on Facebook to home in on a target audience based on various Facebook targeting options such as demographics, location, interests, and behaviors. This type of audience may also be based on or include one or more Custom or Lookalike audiences that are further narrowed with other targeting options. A Saved audience is a good place to start if a business does not have any prior customer interaction, or is just starting off as a business.