Understanding Display Advertising KPI
One of the biggest mistakes marketers make when setting up a campaign is using the same strategy and metrics that have proven to be successful for one stage of the sales process across the board, namely for the entire campaign. The problem with this approach is that you end up treating the same way a prospect that is at the beginning of the ‘discovery’ stage (top of the funnel) as a customer that is already familiar with your product/service and is just one small step away from finally clicking on the “Buy” button.
This is just another example when “one size does NOT fit all” so let’s take a look at some of the Key Performance Indicators (KPI) to see how we can fine tune our campaign for each stage of the sales process.
TOP OF THE FUNNEL
Also known as the “awareness” or “discovery” stage, the top of the funnel is where prospects are primarily looking for answers, resources, and research.
New site visitors: The number of new visitors who came to your site after you launched a campaign. This KPI helps you understand how successful your campaigns are at increasing brand recognition and overall site traffic. Typically, we like to see a good balance between Returning Visitors and New Site Visitors.
Engagement: Engagement, including time spent on your site, or number of pages viewed, is a good indicator of the quality of new traffic to your site. Be sure to compare engagement on a product-by-product basis, too. If your new visitors’ bounce rate is high or their site duration is low, you may need to adjust your strategy or review your landing pages to make sure that they match the main theme of your campaign.
MIDDLE OF THE FUNNEL
The middle of the funnel, also known as the “consideration” stage, is where prospects are evaluating whether your product or service is right for them. At this point is where you will want to start focusing on converting your prospects into paying customers.
Number of conversions: The total number of conversions driven by a campaign. Prospects at this stage are already aware of your brand and your content . Use retargeting to bring them back and to convince them to convert. You may need to adjust your campaigns messaging based on how many of them actually do.
View-through conversions (VTCs): Conversions that resulted from customers who viewed ads but did not click. The truth is, no one likes clicking on banner ads–but that doesn’t mean they don’t influence conversions. How many times do you shop on Amazon and see ads for the products you just looked at all over the place? Even though you don’t click on them, they do remind you about the product and may entice you to go back to Amazon and complete the purchase. In your case, once prospects arrive on your site, take a look at how many of them convert after being served an ad- even if they never clicked one – to get a fair and accurate picture of the effectiveness of each ad.
Attributed closed deals and new sales: The total number of deals closed from prospective customers who interacted with an advertising campaign. In addition to the total number of conversions, you should measure campaigns at the middle of the funnel by the number and quality of deals they’re closing- as well as the number of new sales and overall new customers that they drive.
Cost-per-acquisition (CPA): Also referred to as Cost-per-Conversion, this is your overall campaign spend divided by the total number of conversions. CPA is an important KPI to keep track of across the entire funnel, as a helpful proxy for how effective your teams are at closing, retaining, and cultivating customers.
BOTTOM OF THE FUNNEL
Also known as the “decision” and/or “action” stage, this is the stage where prospects are deciding from whom they want to buy. At this stage, you will want to shift your focus to closing deals that grow your customer base, while also up-selling or cross selling existing customers. KPis at the bottom of the funnel help marketers evaluate the ultimate revenue consequences of their efforts.
EVALUATING YOUR CAMPAIGNS ROI AND LTV
Return on investment (ROI): The net profit generated by your campaign, calculated as the difference between the total revenue the campaign generated and the total cost of running the campaign. In other words, for each dollar you spend, how many dollars you get in return.
Lifetime Value (LTV): Also referred to as Customer Lifetime Value (CLTV) this metric is the net profit attributed to a customer over their lifetime. There are many ways to calculate LTV, but a model that is tailored to the specifics of your sales cycle will be most effective. LTV is important because it helps you calculate your ROI over time.
HOW TO CALCULATE LTV:
LTV= (AVERAGE MARGIN PER PURCHASE X NUMBER OF PURCHASES/CYCLE X NUMBER OF CYCLES )
Let’s use a business traveler booking a hotel room for this example:
- Number of Nights per stay: 3
- Hotel’s Net Revenue per Night: $100; Total: $300 per stay
- Number of Stays per Month: 1; Total 12 Stays per year
- Total Hotel Annual Net Revenue for this Traveler: $3,600 ($300 x 12 months)
In this example, for simplicity, we’re disregarding room rates variances and we’re also assuming a Lifetime Value (LTV) of about 12 months.
Let’s move on now to calculate ROI based on the above scenario:
- LTV = $3,600
- CPA = $30 (this is what you paid to “acquire” this new customer)
- ROI = ($3,600 – $30) = $3,570
IMMEDIATE ROI: ($300 per Stay – $30 CPA) = $270 (about a 10:1 ROI)
LIFETIME VALUE ROI (12 MONTHS): (12 STAYS X $300 PER STAY) $3,600 – $30 CPA = $3,570
Now you can see why understanding your ROI and LTV numbers is critical for the success of your campaigns. Even if you only get a 5:1 or 6:1 “Immediate ROI” when you factor in your specific LTV number, you realize that your marketing budget is providing you with a healthy ROI in the long run.
In a future blog article, I will focus on other aspects that also measure the success of your campaigns, especially when you’re running several campaigns simultaneously. The key element is Attribution.
Thank you for reading. Until next time, this is Manuel Gil del Real (MGR).
Sources: AdRoll Sojern, Google AdWords, Wordstream