I recently left my Finnish Market Lead job at Google’s Global Marketing Services team to be part of Finch’s growth success story in Europe. One of the things that I picked up from Finch’s CEO, Bjorn Espenes, years before he was able to cajole me into joining the company was his famous presentation tagline: “Repeat after me, CPA is bad.” This was followed by a clear and compelling explanation of what metrics really matter to a business. Even though digital advertising professionals are now largely comfortable with these key online advertising metrics, they are sometimes caught off guard having to explain the metrics to other teams and key personnel in their organizations who have not yet had enough exposure to the new set of digital advertising key performance indicators. Here is a recap of some of the most vital KPIs as well as a quiz to test yourself for whether you truly master these concepts.
CPA = Total costs / Total number of conversions
“What it costs me, on average, to get a desired action”
CPA = Cost per acquisition
This metric that measures the average costs that go into getting one desired action, i.e.: a conversion. The key shortcoming of CPA as a KPI metric is that it does not take into account the value of the item or service sold. Imagine an extreme example where you were selling keychains and Ferrari’s at a CPA goal of 200 Euro. It is immediately obvious that you’re paying way too much for every keychain sold but that you’re woefully underbidding on Ferraris. You’re throwing money away on keychains and losing out on big opportunities to sell Ferraris. A more realistic case could be a company selling handbags where some of them are Oasis branded handbags that only cost 20 Euro and others are Gucci handbags that cost a small fortune. Both purchases could be triggered by the same keywords. It is increasingly rare that CPA is the best possible metric for an advertiser. Even traditional lead generation clients like insurance companies and medical centers are increasingly moving towards understanding the value of each click: Did the consumer coming in with the keyword “insurance” get an expensive car insurance or a quick travel insurance or even both? Did the prospective patient book a general practitioner visit or an MRI scan? The cash flow difference is immense and needs to be accounted for or big money is left on the table.
ROAS = (Revenue of Campaign / Cost of Campaign)
“When you put one Euro in, this is how many Euros you get out”
ROAS = Return on Ad Spend
This is a digital marketing metric that tells you what return you are getting for your advertising investment. ROAS can either be expressed as a ratio, e.g.: 5:1 or percentage, e.g.: 500%. In the AdWords interface, you can view this by enabling the column “Conversion value/cost.” A ROAS of 6.5:1 or 500% would essentially mean that when you put 1 Euro in, you get your 1 Euro back and 4 Euro more on top. What ROAS each company should be aiming for is dependant on their gross margins (includes costs like product or service profit margins and operating expenses). Higher margins mean you can afford a lower target ROAS KPI because you have more leeway before you become unprofitable. ROAS and ROI (Return on Investment) are closely related but, notably, not the same thing though often confused. ROI is a measure used to investigate the amount of additional profits produced by an investment. ROI tells you how much more or less you get in addition to your investment. An ROI of 400% is thus the same thing as an ROAS of 500% - a significant difference!
CPV = (Cost of Campaign / Revenue of Campaign)
“A CPV of 10% means your costs are 10% of your sales revenue; for every Euro of sales, 10 cents goes into advertising costs and you are left with 90 cents”
CPV = Cost per Value
This is also known as Cost of Sales is a metric that shows cost as a percentage of revenue. The CPV is more convenient to ROAS as a cost-efficiency metric as it gives a clearer indication of expense and return ratios. Looking at a CPV of 27.5% clearly indicates how much you make on every Euro whereas the respective ROAS of 3.77:1 or 377% can be a bit confusing especially when this could be easily confused with being the ROI. Regardless of which one you personally prefer, you can always easily switch between the metrics as ROAS and CPV are the inverses of each other.
CPV = (1 / ROAS) * 100% and ROAS = (1 / CPV ) * 100%
Profit is what your business is ultimately after. It's great to make high revenues at low costs of sale however based on your margins, a sale might be hugely profitable or even losing your business money. The Holy Grail of pay-per-click advertising is when you are continually measuring how much profit you make on each individual product that made it into your customer’s shopping cart. Did an electronics retailer’s customer who searched for “smartphones” resolve to buy a high margin iPhone or a low margin Doogee phone? Finch’s pay-per-click profit automation solution also allows you to take things like audience, device, production, shipping, and currency exchange into account when focusing on maximizing your business's overall profits.
Net Profit = Total Revenue * Net Profit Margin
Net Profit = Revenue of campaign* Profit margin - Cost of campaign
The Online Advertising Metrics Quiz - Are you Ready?
So you think you got these metrics covered and are ready to fend off anyone in your organization who has their numbers mixed up? Test yourself to be sure!