25th July 2019
4 Min Read
One of the most common tropes in popular media is the image of an airline pilot flying blind. He is forced to fly strictly on instinct, navigating through the inevitable storm systems, engine loss and panicking passengers. While more often than not, the pilot is somehow able to safely land the plane, real-world experiences could not be more different.
Advertisers Shouldn’t Fly Blind
Although the stakes aren’t nearly as high, advertisers face a similar predicament if they fail to monitor their own instrument panel over the course of a campaign. Advertising metrics are a vital component of modern digital campaigns, which are usually tasked with the responsibility of stretching ad spend while maximizing return on investment (ROI).
While technology can certainly assist you throughout the process by infusing significant efficiencies in the various stages of a campaign, routinely monitoring those all-important metrics is akin to that airline pilot getting a plane full of passengers to the intended destination with the guidance of the onboard instruments.
While no one expects every team member to be an absolute wizard with metric calculation, a remedial understanding of cost and performance analysis along with the ability to perform at least basic calculations can be extraordinarily helpful in making sure everyone is on the same page.
Budgets are never unlimited, further efficiencies must always be sought, and ROI should always be trending upwards. This is just a handful of the realities faced by modern campaigns in the dynamic world of digital advertising.
Fortunately, no one needs to dust off their old undergrad calculus textbooks to gain a reliable understanding of how the various metrics work. In fact, the method behind the madness isn’t madness at all, but just a handful of calculations that are only intimidating at first glance but surprisingly friendly once you get to know them.
Start With the Basics
Given that most advertising metrics involve cost efficiency and effectiveness in some capacity – either directly or indirectly – the various costs used in different metrics is a good place to start.
Different cost measurements are used in different capacities to gauge those efficiencies. Actual bid costs can be calculated with metrics like cost per click (CPC), whereas other metrics like customer acquisition cost (CAC) and customer lifetime value (CLV) are used for more wide-sweeping ROI calculations that look at the bigger picture rather than unit costs per placement.
When it comes to the different types of costs, however, lending the process a degree of consistency is especially important to advertisers, as they must be able to directly compare relative cost and performance across the many channels they employ.
CPC and cost per impressions (CPM) are metrics that can easily be compared to each other to analyze relative cost efficiency. Depending on the nature of the campaign, both are key components in determining the best use of ad spend. Fortunately for those that aren’t mathematically inclined, the most common platforms provide these metrics on a consistent, real-time basis so your time is spent evaluating the data rather than generating it.
Applying the Metrics
While both CPC and CPM are valuable in their specific applications, knowing under which circumstances to use them is where they’re insightful. Being cognizant of your campaign objectives can save you a fair amount of time and frustration by clearly indicating which metrics are purposeful to your particular needs.
For instance, if your primary goal is to raise awareness of your product and brand, CPM will provide the most insight as it measures ad spend relative to impressions. Alternatively, if you’re aiming primarily to drive traffic to your website, both CPC click-through-rate (CTR) are useful, CTR with the effectiveness of your ad to draw clicks and CPC to measure the financial impact of those clicks.
Collectively, these different metrics help advertisers quantify the overall impact of their campaigns based on engagement measured by clicks as well as how those clicks factor into their ad spend budgets. They work in unison with each other and only provide a thorough picture of impact and cost when used in the proper place and context.
Acronyms Galore: CAC, LTV and ROI
ROI is both extraordinarily useful and popular because it provides advertisers a convenient way to judge the effectiveness of ad spend being converted to actual profits. Customer acquisition costs and lifetime value are the foundation for ROI calculations. They represent a more comprehensive perspective of total costs and value of a customer base built exclusively on advertising, as defined by the following:
CAC = (Total Advertising Costs)/(Total Number of New Customers Acquired in a Period)
Advertisers often track multiple versions of CAC according to geography, new markets, existing markets and particular campaigns to prevent skewed results. CAC per channel is a good example of this idea.
A first cousin to the CAC metric is customer lifetime value (CLV), a method to quantify the value of an average customer. CLV equations can get quite complicated if an advertiser chooses to include discount rates to use the net present value of cash flows. This is a simpler version of the formula:
CLV = (Average Customer Lifespan)*((Average Order Value)*(Purchase Frequency))
Once CAC and CLV are calculated, ROI is a simple equation away:
ROI = (CLV – CAC)/CAC
As a slight caveat, ROI is a ubiquitous metric that is more business-oriented and not exclusive to advertising. For that reason, many brands and advertisers also use return on ad spend (ROAS) to specifically target ad spend performance with the following:
ROAS = (Gross Revenue from Ad Campaign)/(Total Cost of Ad Campaign)
Making Sense of It All
Data does you absolutely no good if it’s not placed in the proper context. Use these values to analyze trends, campaigns and channels to see where ad spend is going and what strategies are working best.
Integrating technology into your process can significantly lower costs by reducing overhead and automating manual tasks that previously drained valuable time and resources. Lower costs stretch your ad spend and increase profitability measures like ROI.
Once you have a better idea of where money is being spent, what strategies are working best, and what it all means to the bottom line, you’re bound to work more efficiently and effectively.
