“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” – John Wanamaker, the Father of Modern Advertising
In a nation where $39,000,000,000 is spent annually on online advertising alone; guessing whether or not those display, remarketing and pay-per-click ads are working just doesn’t cut it anymore. You can slice and dice your web analytics data any number of ways, from ROI to CPA to CPC to OPP*, to try and evaluate the performance of those ads, but those don’t always quite capture the big picture.
So what’s a marketer supposed to do?
My favorite way to leverage all of the information we have accessible and make data-driven decisions is the Effective Cost-Per-Acquisition and Return on Investment.
Step 1: Identify the TRUE goal of the ad.
Take a look at this pay-per-click ad on the term “brown knee high boots size 5″
The way I see it, the goal of the ad is to get new visitors to the Acme Boutique to buy brown knee high boots. Sure, if the person coming to the site buys jackets, earrings and pants – great! But, the copy is just centered around selling boots.
Why just new visitors though? Well, the whole point of a campaign where you bid on generic, non-brand terms is get awareness out to users who may not have previously heard about the Acme Boutique.
Whenever you have online advertising, you run the risk of having customers who are already familiar with your brand (This doesn’t apply to remarketing campaigns which are another beast), click on your ad as a means to quickly get to your site. There you go wasting money on people who would’ve come to your site anyway.
Step 2: Evaluate the ad performance.
Now that you have outlined what the goal of the ad is, you can accurately evaluate if the ad is getting the job done.
Let’s say that ad cost you $1,000 to run and you made $10,000 in revenue from 100 transactions. With traditional ROI calculations, you’d say you have a 900% ROI and be done, but what about the big picture?
What if I said that only 25 of those transactions were from people who were new visitors to the site and only $4,000 was spent on shoes? Would you say the ad accomplished its goals then?
The effective return-on-investment is only 300% then.
The effective cost-per-acquisition is $40.
Step 3: Make relevant, data-driven decisions about the ad.
So now that you have different numbers, what do they mean and how can you use them? The effective CPA and ROI metrics are a more accurate gauge on if the ads you’re investing in are effectively doing what you intend them to and can point you in the right direction to further investigate your marketing strategy. With more insight into the performance of the ads, you can combine this knowledge with other critical elements of your business.
- If your business runs on lead-generation, you can start to figure out how much each lead is worth to your organization and how much to invest towards lead-generation campaigns based on these new metrics.
- If you’re selling specific products, you can evaluate if you’re advertising the right products in the right places to the right people. If you’re advertising boots and everyone is buying jackets, imagine what your click-through and conversion rates could be if you were advertising what they were actually shopping for.
- It might be a start to figuring out if your paid search campaigns are starting to eat into your organic traffic and cannibalizing your business. If it turns out the majority of your users are already familiar with your brand, the effective CPA will make a case for discontinuing advertising on those particular keywords or ads.
- If you know have a good grasp on what the margins on your products are, you can evaluate really quickly if you’re making/losing money on your advertising efforts.
The metrics are just some of the key performance indicators we use to evaluate how our campaigns are doing. Plug the numbers into an Excel sheet and see if they might work for your business model.
Now that you know how to calculate the effective ROI and CPA of your campaigns, look for our next blog post in this three part series on how to use those metrics to build revenue forecasting models to predict how additional investment in online advertising will actually add to your bottom line.
* Just kidding, OPP isn’t a real marketing term. Just making sure you’re paying attention.