Key Performance Indicators in Marketing: 7 KPIs explained
Running ads can be tricky; running good ads, trickier. In order to even start optimizing your ads, you have to know whether your ads need optimization in the first place – how are they performing – and what aspects of your ad need improvement. Most platforms, including Facebook and Google, will provide you with metrics on how your ads are performing. Or rather, they provide you with metrics that you can use to determine how your ads are performing and what aspects of your marketing strategy need improvement.
The basic metrics you should know about are:
- CPM (cost per thousand views)
- CPC (cost per click)
- CPA (cost per acquisition, sometimes cost per action)
- Bounce rate
- ROAS (return on ad spend)
- ROI (return on investment)
- LTV (lifetime value).
What metrics you should use to measure the success of your marketing depends on your goals.
CPM: Cost Per Thousand Views
A lot of platforms, including Facebook, charge you each time they display your ad. How much you are paying for each view is be measured in CPM, how much you pay for every 1000 views. CPM is a great metric if you are aiming to increase general awareness and brand visibility and you don’t care who sees your ads. It’s not a very relevant metric however if you want to drive conversions or get people to your website. This is because advertising platforms usually price different audiences differently. The cheaper the audience, the lower the CPM. If an audience is cheap, this is usually because no one else is willing to spend more money advertising to this audience because the audience either doesn’t convert well or doesn’t spend much. Only advertising to the cheapest audiences to keep your CPM low is a mistake if you care about who sees your ads. In fact, you can often tell what audiences you should advertise to (to drive traffic or sales) by how expensive they are. Your competitors have usually done research or have experience and might better know which audiences either have more purchasing intent or deeper pockets. As such they know which audiences to spend more money on, driving the CPM for this audience up. This is not just the case for high CPM audiences but also high CPC (cost per click) audiences on platforms where you are paying per click instead of per view. In such cases, a high CPC is a good indicator that the audience (or keyword) shows a lot of intent or converts well.
CPC: Cost Per Click
The next metric, CPC (cost per click), can be used in two different contexts. On platforms where you pay per click (PPC), you pay every time someone clicks your ad rather than every time someone views it. In this case, CPC functions very similarly to CPM as an indicator of how expensive an audience is. In pay per view campaigns, however, CPC – while still dependent on audience price – is calculated by dividing the total cost of your ad by the total number of clicks. If it costs you 100€ to show your ad 1000 times, but only ten people click the ad, your CPC is 10€. It can also be calculated by dividing CPM by the click-through rate (CTR, the ratio of people viewing the ad to people clicking it). If your CPM is 100€ and 10% of people viewing your ad click it, then your CPC is 10€. The better your ad creative, the concept, content, design, and placement of your ad, the higher the CTR and, as such, the lower the CPC. Of course, if you are advertising to the wrong audience, your CTR will abysmal. If you are showing ads for home repair tools to a 13- and 14-year-old, urban audience, chances are none of them will be interested enough in your ads to click on them. Take the same ad and show it to an audience of suburban parents and your results will be totally different. Let’s say your ads are amazing and so enticing that even teens with no interest in power tools click on them. Well, that brings us to our next metric: CPA.
CPA: Cost Per Acquisition
CPA, cost per acquisition, is dependent on what people do after clicking on your ad and going to your website. It measures how much, on average, it costs you to get someone to take a specific action (e.g. purchasing a product) on your website. This calculated by dividing the total cost of your ad by the total number of acquisitions (i.e. conversions). Your ads’ CPA is dependent on the corresponding CPC and CPM (people can’t convert before they’ve seen your ad and clicked on it) but, by looking at all three metrics simultaneously, they can tell you a lot about how your audience views your website and/or product.
If your ad’s CPA is disproportionately higher than its CPC, this can indicate one or more of a variety of issues: the website doesn’t match the ad, the ad overpromises, the website itself is problematic, or the audience isn’t very good. First, your ads should send people to relevant pages that match the ad’s content perfectly. If you’re a psychologist, an ad about depression shouldn’t send people to the front page of your website but rather to a subpage specifically about depression and how you can help with that issue. Another explanation for a disproportionally high CPA is that the ad promises something that you can’t deliver on. If people click your ad because you advertise a quick fix to depression, but your website tells them it will take multiple sessions with a therapist to get better, a lot of people won’t convert. A further issue that is more common and leads to a high CPA is a slow or buggy website. People get frustrated and leave without converting, even if your service or product is exactly what they were looking for. Finally, (and this might sound strange) it could simply be your audience’s fault. Your ads might be targeting people that are interested in your ad and click on it but for some reason don’t want to convert. Back to the kids being shown ads for home repair tools. Some of them might be interested in power tools and click on the ad to find out more. But they’re not there to buy your product but rather to look and browse. Most won’t have the means (or permission) to buy your product. Nothing you could do would make them convert, your mistake was advertising to them in the first place (if you wanted to drive conversions).
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If you are having trouble telling whether your CPA is disproportionately high, you can take a look at your bounce rate (how many people leave your website after viewing only one page). A high bounce rate will indicate that people going to your website are dissatisfied for some reason, whether it be because the landing page doesn’t fit the audience’s interest, the link they pressed on promised more, the quality of the landing page is low, the website is slow and buggy, or a combination of any of these. A discrepancy in bounce rates between different browsers (people visiting the site with Chrome are a lot less likely to leave your page than people visiting with Safari) or between devices (people visiting on desktops are less likely to leave than people using their phones) can indicate responsiveness or compatibility issues: Your website is performing badly on Safari and phones.
The Relationship Between Key Performance Indicators in Marketing
The metrics we’ve covered so far are, to some extent, missing context. What exactly is a high CPM and what is a low CPC? This varies from campaign to campaign and depends on what you are trying to achieve as well as how much you make from ads in relation to how much you spend on ads. This can be calculated as ROAS: return on ad spend. You can calculate it by subtracting the cost of an acquisition from the value of an acquisition. If your ad campaign costs 100€ and it sells 200€ worth of product, your ROAS is 2 or 200%. This is how you can measure whether your ads are losing or making money. However, using ROAS to measure whether your ads are “worth it” is a bit fallacious. It focuses entirely on immediate returns, ignoring branding or lifetime value (LTV). This is a problem ROI, return on investment, also shares. While it takes other, more general expenses like salaries and production costs into account, it also only focuses on immediate returns.
A metric that does account for long-term returns is LTV, lifetime value: The total amount a customer will spend from first to final purchase. It can usually be calculated based on existing data as the average order total times the average number of purchases in a year times the average retention time in years. Using LTV instead of solely focusing on immediate returns can save you from discontinuing an ad that has low short-term returns but is worth it in the long run. An important thing to remember when calculating LTV is that it is only an estimate based on existing data. Not having enough data can make it impossible to determine an accurate LTV which can skew long-term plans.
In general, Key Performance Indicators in Marketing should not be relied on as black and white indicators of success, but rather as indicators of problems and opportunities. Using ROAS to determine if your ads are successful can be just as fallacious in the long run as only running ads with a low CPM. Instead, treat metrics as indicative tools to be used in combination with each other. You can use ROAS with ROI and LTV to see if you can afford your ads in the short run for a larger payout later on. Cost per views, per clicks, and per acquisitions can – together – tell you how your audience is responding to your ads and your website and whether the two are not working well together. Endless possibilities, as long as you don’t aim for a single metric blindly.