How to Evaluate Advertising Campaigns Across Digital Mediums
In this post, we hope to help to help business owners and marketing professionals understand the opportunity in digital advertising and how to evaluate the performance of their campaigns across digital channels.
In our experience, businesses struggle to grow because they don’t have confidence in their digital advertising campaigns. We’re hoping to help people understand how to evaluate their campaigns so that they feel more comfortable spending money on ads. Or, on the flip side, if their campaigns aren’t profitable, we hope to be able to help them see that and avoid wasting money on an ad channel that isn’t working for them.
Intro to Digital Advertising Platforms
Consumers are spending more and more time on digital platforms. Businesses big and small know this, and they’re adjusting their advertising strategies to reflect the new reality. Internet advertising in 2017 was an $88 billion dollar market with a steady growth rate of over 20%, meaning we expect businesses to spend upwards of $100 billion dollars on digital advertising in 2018.
Much of this spend is going towards two important channels– search and social. Google and Facebook are dominating the digital advertising industry. Of that $100B+ in projected digital advertising spend for 2018, 90% or more is expected to be allocated towards those two tech giants. With Facebook controlling their own social platform as well as Instagram, which they acquired in 2012, and Google owning their search engine as well as YouTube, the popular video sharing site, the two platforms command a significant amount of consumers attention on a daily basis.
Business owners and marketing professionals know this, which is why they’re scrambling to throw more and more money at the two channels– they know that Facebook and Google control the audience, and they see a clear ROI on their advertising investments.
Nearly gone are the days of print and television ads, as these trends are only expected to accelerate. Say hello to the new era of advertising.
Google and facebook allow you to specify what bid model you’d like to use when you set up your campaigns.
- Cost-Per-Click (CPC)
- Cost-Per-Thousand-Impressions (CPM)
- Maximize Clicks
- Maximize Conversions
Search vs Display Advertising
When you’re setting up your digital advertising campaigns, you’ve got options. Through the Google AdWords interface, you can run search ads, shopping ads, display ads, or video ads (via YouTube). Facebook’s Ad Manager interface allows you to run display ads, lead generation ads, shopping ads, and video ads.
You’ll need to clearly define the goals of your advertising campaigns in order to choose the appropriate campaign type.
Evaluating the Performance of Your Digital Advertising Campaigns
When evaluating digital advertising campaigns, most business owners are focused on one metric– ROI. ROI, or Return On Investment, is a calculation that approximates how much money you’ll make given a certain amount of spend. We’ll go over how to calculate your important metrics like ROI and ROAS, but first, let’s look at what other things you might want to consider.
ROI vs ROAS
Your return on investment, or ROI, is a slightly different calculation than your return on ad spend (ROAS).
Most of the time, you’ll be paying someone to manage your ad spend, whether that be an employee, contractor, or agency. The amount you spend in management fees is part of your investment, but not part of ad spend, so ROI is a slightly deflated version of ROAS.
ROI = (Revenue) / (Total Investment) = (Revenue) / (Ad spend + Fees)
ROAS = (Revenue) / (Ad Spend)
Usually these numbers are represented as percentages. So, if you spend $100 dollars in ad spend and generate $200 in revenue, your ROAS is 200%.
A standard management fee charged by ad agencies and contractors could be 10-20%.
Assuming your agency is charging you 20% to management your $100 spend, your total investment is $120. So, if you generate $200 in revenue off your $120 investment, your ROI is 166%.
Depending on your margins and operating costs, these numbers may or may not be profitable. It’s up to you, as the business owner, the set a target ROI on your campaigns. If you’re in a high margin niche, a lower ROI might be acceptable, but if you have small margins, you need a big ROI.
If you’re only going to track one metric in your advertising campaigns, it should either be ROI or ROAS.
But sometimes it’s hard to track the real ROI of your ad campaigns. Maybe your display campaigns are getting exposure for your local business and more people are walking into your store because of it. In that case, you may need more detailed metrics to evaluate the performance of your advertising campaigns.
Key Performance Indicators and How They Relate to the Age-Old Sales Funnel
Many business owners are probably familiar with the classic example of a sales funnel. The concept is applicable to most if not all businesses.
In the digital age, we can use metrics to represent different steps in the sales funnel. For an ecommerce company, the funnel might look like:
- Awareness = Impressions
- Interest = Clicks
- Consideration = Phone Calls, Emails, Live Chats
- Decision = Add to Cart
- Intent = Checkout Initiated
- Purchase = Purchase Complete
Knowing the conversion rates of each step in the funnel to the next and from each step to the final can help you understand the value of a user at each step in the funnel. You can use this value to inform what you’re willing to pay to get a user into your funnel at a certain point.
For example, if you know that 10% of website visitors will call you for an appointment, and each appointment generates $500 in profit, then paying anything less than $50 per click to your website would be expected to be profitable.
Where Should You Put Your Money?
Ultimately, you want to spend more on the advertising channels that have the strongest return on investment, or highest ROAS. But not all businesses will be able to calculate ROAS effectively. In those cases, you’ll have to rely on other metrics. Here’s how to find them.
How to Calculate Your CPM, CPC, CPL, and CPA Across Platforms
As we discussed earlier, the age old sales funnel isn’t dead- it’s just being transformed. If you’re having trouble calculating ROAS for your business across advertising channels, you’re not alone. Businesses that serve a local audience or have a small volume of online transactions may struggle to attribute those transactions, leads, and phone calls to their ad campaigns.
In those cases, we recommend using metrics from higher up in the funnel to inform where you put your ad spend.
CPM: This metric is usually readily available in the UI of the platform you’re advertising on, although some platforms won’t give you impression data. CPM, or Cost per Thousand Impressions, is a calculation of how much money you’d have to spend to get your ad seen 1,000 times. Impressions is the equivalent of someone being aware you’re business exists.
CPC: Whether advertising on Facebook, Instagram, Google, or any other number of digital ad platforms, you should be able to calculate this metric. Often times the platform will give it to you without needing to do any calculations at all. Cost per Click is a calculation of how much money you have to spend to generate a click to your website. You can think of a click as a user expressing interest in your product or service.
CPL: Often times, the goal of a businesses advertising campaigns is to generate leads. This is especially true of local businesses, as online transactions are not relevant or realistic. Leads are often captured in the form of email addresses, names, phone numbers, and more. Businesses will often use a “lead magnet” – often a downloadable PDF- to entice users to give the business information about themselves. You’re reading one now. Other forms of lead generation would be webinar registrations, phone calls, appointments, etc. When a lead is generated, it’s often an indication that the user is moving a step further down in your sales funnel. You can calculate your Cost per Lead by dividing your total ad spend by the number of leads you’ve generated.
CPA/CAC: Cost per Acquisition, or Customer Acquisition Cost, is a calculation of how much you’d have to spend on advertising in order to acquire a customer. It’s an easy calculation for app developers and ecommerce companies. It’s nearly impossible for local businesses.
The Importance of Understanding Your Customer Lifetime Value (LTV)
Customer Lifetime Value, often referred to as LTV, is a calculation based on the amount of revenue you expect to generate from a new customer over the course of their patronage of your business.
This will be a very different calculation for a business with high retention rates vs one with high customer churn.
Take this example.
A local dentist is having a really hard time attracting new clients and asks Sophie to help him get new customers. He gives Sophie a $1,000/m budget, and Sophie charges him 20% to manage his ad campaigns.
After a month, the runs the numbers. He invested $1,200 in advertising.
He’s gotten 10 new clients. He looks at the revenue and gets angry.
“I’ve only generated $1,000 in revenue. I’m losing money!”
But he’s not, really. Sophie explains…
A local dentist might expect 90% of new customers to come back every six months for 5 years, on average, with 10% of new customers churning after their first visit.
Assuming each visit represents $100 in revenue, if we bring the dentist 10 new clients, we can look at his ROI in terms of client LTVs.
Although the dentist only makes $1,000 on the first visits, he’s expecting 9/10 of those new clients to patron his business for the next 5 years, twice per year. That’s an additional $9,000 in revenue.
So rather than using the $1,000 of revenue generated on the first visits, the dentist should be thinking about his client LTV when evaluating the effectiveness of his ad campaigns. If he spends $1,200 to get those new clients, he’s still generating an ROI of 833%, and it doesn’t get much better than that.
This is why understanding the LTV of your customers is important when evaluating your ROI and the performance of your advertising campaigns.
The Wise Business Owner’s Approach
Digital advertising can be complicated. Or it can be really easy.
Our recommendation is for business owners to test several different advertising channels to see which channel performs best for them.
At a certain point, that channel may begin to show a smaller ROI as your ad spend is increased and you begin to reach a less qualified audience. This is the time to diversify your ad spend and experiment with new channels.
How to Get Started with Digital Advertising
Advertising through Facebook and Google can be as simple or as complicated as you’d like it to be. If you’re reading this and haven’t written something similar yourself, we’d recommend seeking guidance before setting up your campaigns.
It’s easy to throw up a campaign on either network and cross your fingers, but it’s also really easy to throw money away with inefficient or poorly structured campaigns.
Depending on your familiarity and comfort level with digital advertising, you might be better off handing your ad budget over to a professional. You’ll save time, cut your learning curve, and it’s less likely that your budget will be wasted with misconfigured campaigns.
About the Authors
Riley is an SEO/SEM, CRO, and UX consultant and the founder of Monte Verde Media. He consults with businesses big and small on how they can use search traffic to attract, convert, and retain more customers to their brand. His team specializes in search engine optimization, paid search advertising, web design & development, and content marketing.
Sophie is the founder of Olive and Milo, a social media marketing agency based in Burlington, VT. Sophie helps business owners leverage social media to build awareness and increase their revenue through social media.
You can reach her through her website oliveandmilo.com.