The ABCs of Digital Advertising KPIs

Appeared in MarTech Advisor

KPIs, or key performance indicators, are data points that help you track progress towards business goals and identify areas for improvement in performance. KPIs can relate to the business as a whole or to specific operational concerns, such as sales and marketing.

For digital advertising, KPIs typically relate to the cost and effectiveness of digital ad campaigns, or to specific customer or prospect behavior—for example, how long it takes on average for your qualified leads to convert into a paying customer, or how many retargeted ad views it takes before a prospect clicks the ad and visits your site.

Why KPIs Are So Useful to Your Business and Its Marketing

KPIs are important for a number of reasons.

First and foremost, accurate and up-to-date information about marketing and advertising efforts lead to better decisions. Things move quickly in digital advertising, and it’s important to be able to try things quickly when necessary, in order to remain agile and responsive to market changes. Armed with current data and information about the performance of your current ad campaign, you can shift more money and effort into the tactics that are producing the best results and away from underperforming contexts.

Secondly, the things that you measure on a consistent basis tend to get more of your time and attention. This ultimately leads to better results as well.

Finally, tracking KPIs in your digital advertising program helps you replicate successes in the future while simultaneously avoiding past failures. Data points that illuminate the specific steps taken in past successful campaigns can then be integrated into future ones for an improved shot at those same results, or better.

Implementing KPIs and (crucially) sharing them with key personnel helps your marketing and sales teams improve their own work performance, optimize your ad campaigns, and ultimately close more sales to realize greater profits.

Specific KPIs to Monitor in Your Digital Advertising & Marketing Program

As a method of data collection and analysis, KPIs are essential tools for businesses of all sizes. Yet not all metrics are right for all businesses. In KPIs as in advertising, there is no one-size-fits-all solution. Your KPIs must be selected based on your industry, your marketing strengths and opportunities, and most of all your company’s goals.  

That being said, several KPIs in the area of advertising and marketing provide valuable insights for many businesses. Consider whether these metrics help you get closer to your own business goals. These aren’t the only KPIs you can track, of course. However, many small business advertisers find these particular metrics a good place to start.

Conversion Rate

Your conversion rate is simply the percentage of all people who clicked on your ad, who then took the specific action you want them to take. That action might be signing up for your email list, signing up for a free trial of your product or service, or making a purchase.

The conversion rate, expressed as a percentage of the total number, gives you a picture of how effectively your landing page delivers on the promise made in the ad itself. If there is a tight fit between the ad copy and the content of the page that ad leads to when a user clicks on it, your conversion rate should be fairly high.

The formula for CR is pretty straightforward. First, divide your total number of conversions (however that’s defined for the campaign or ad in question) by the total number of clicks that ad received. Multiply that result by 100 to express as a percentage.

Represented visually:

Number of Conversions / Number of Clicks) x 100 = Conversion Rate

Return on Investment (ROI)

The ROI of any marketing plan or campaign is a straightforward illustration of what you’re getting in return for the expenditures for that campaign. For example, if you’re analyzing the ROI of an ad campaign, you’re calculating how much revenue you can expect from each dollar you spend on the campaign.

The biggest issue in calculating ROI is specifying which costs should be taken into account in the formula. Clearly, the actual fees your business pays to the display network or ad platform are counted. But what about the fee you paid the ad copywriter? Should you include the licensing fee you paid for the use of the stock images? For the clearest and most accurate data, most experts suggest including all costs directly attributable to the campaign—so, yes, factor in the copywriter and the stock images.

To calculate your ROI, simply add together all your costs for the campaign in question, then subtract those costs from the revenue attributable to the campaign. Divide that result by the total costs of the campaign to reach the final figure.

Represented visually:

(Campaign Revenue - Campaign Costs) / Campaign Costs = ROI for Campaign

Cost per Acquisition (CPA)

Another way to evaluate the effectiveness and cost of your ad campaigns is to track the Cost per Acquisition KPI. This KPI measures how much it costs your company in dollars to acquire a single new customer.

This isn’t the same as ROI, of course, which measures the revenue generated by your investment into a specific campaign. Here, we’re looking at how much money it’s costing you in this specific campaign to gain one new customer. If that result is too high, your campaign is less effective, and you’ll want to make adjustments to lower the campaign costs or increase the number of customers gained.

The CPA calculation starts with the total campaign costs—that is, the amount in dollars your company spent to acquire new customers through that campaign—and divides it by the total number of new customers gained through that campaign.

Represented visually:  

Total Campaign Cost / Total Number of Customers Acquired Through the Campaign = Cost per Acquisition ($)

Lifetime Value (LTV)

Customer Lifetime Value (CLV or LTV) is a KPI that takes a view extending beyond the active life of a specific advertising campaign. It measures the value to your company of a single customer over the entire course of their experience with your brand.

From the first purchase all the way through to the last, each customer’s value to your business reflects back a metric that helps you determine how well you’re holding on to existing customers, as well as to what extent they’ll keep coming back. In a sense, it’s also a measure of customer loyalty.

The formula for LTV is reflected in two sequential equations:

1. First, multiply the value of the customer’s average purchase by the average purchase frequency rate to arrive at your customer value metric.
2. Next multiply customer value by average customer lifespan for the LTV.
    

Represented visually:

Average Customer Purchase x Average Purchase Frequency Rate = Customer Value
Customer Value x Average Customer Lifespan = LTV

What About Click-Through Rate (CTR)?

One of the first KPIs to be tracked seriously in the early days of digital advertising, CTR doesn’t really relate to your business’s fiscal or operational health. In that sense, it may on occasion fairly be termed a “vanity” metric.

Simply put, your CTR in and of itself doesn’t reflect any action you want your prospective customers to take. It’s far more effective to put energy and attention towards tracking KPIs that reflect actual value to your company, whether that’s an impact on profits, revenue, or cost of acquisition.

Choosing KPIs

It’s crucial to begin the KPI process by formulating and committing to specific, measurable goals. Those goals can then help you identify the KPIs you want to track. Keep in mind that each KPI is designed to show you the progress your company is making towards those goals.

Once you’ve selected KPIs to track, you can then start the process of pinpointing how the metrics will be tracked, analyzed and reported. Many CRM programs and marketing analytics solutions will help you process the raw data and represent it in a visually compelling and easily understood way.