Ad Spend Success: Measuring Your Way to a Profitable Ad Campaign
Ad Spend Success: Measuring Your Way to a Profitable Ad Campaign
If you’re only measuring sales to gauge success or failure in your marketing, you’re missing most of the formula needed to accurately determine return on investment (ROI.) To really understand ROI, you have to first understand the deeper results of your customer’s behavior.
Many advertisers look purely at the Cost Per Sale (CPS) to determine if an advertising buy is valuable or not. That is only part of the story. For example, if an advertiser purchases $30 worth of traffic that generates $50 in sales, the ROI is $20, right? Not so fast. Consider: Is that $50 from a single sale or a combination of smaller transactions by multiple customers? Is that customer only worth a single sale, or do your customers return for additional purchases or subscribe for multiple months? Did you have to pay a commission or referral fee for those sales?
Tracking and measuring data from your ad spend is the only way to measure your success and scale your marketing efforts. As the great Mark Twain once said: “Most people use statistics the way a drunkard uses a lamp post, more for support than illumination.”
If you’re not using a tracker, read our Guide to Affiliate Tracking Platforms first.
Key Metrics to Know:
Cost Per Mille (CPM) Cost per 1,000 ad impressions/views.
Cost Per Click (CPC) The amount you are charged each time your ad is clicked.
Click Through Rate (CTR) The ratio of how many times your ad needs to be viewed to receive a click through. This is calculated by dividing the number of impressions by the number of clicks.
Cost Per Lead (CPL) CPL is how much money you need to spend on impressions or clicks to generate a lead. A lead may have a value associated with it such as a trial membership or it may simple be a potential customer entering in their email address or accepting push notifications from your site.
Cost Per Acquisition (CPA) The actual cost of acquiring a paying customer either directly from your advertising or a conversion from a lead your advertising generated. This is calculated by dividing the advertising cost by the amount of conversions.
Retention Rate – Once you’ve secured a paying customer, how long does that customer stay active? For example, if you are selling a monthly membership of $30, how many months does that customer continue to subscribe?
Lifetime Value (LTV) LTV is the long-term value of a customer, and the main key to determining the value of your advertising buy. If your average client spends $100 per month for an average of 10 months, your customer LTV will be $1000.
This re-enforces the point of why digging deeper into your ROI is essential. If you had stopped calculating ROI at the Cost Per Sale level, your ROI worksheet may look something like this:
- Advertising Spend: $500
- Initial Sales Price: $100
- Sales Generated: 3
- ROI: -$200
From this, it looks like your ROI is in the negative, only generating $300 in sales from a $500 ad spend and you would likely not continue that advertising campaign. However, if you calculate the LTV, things look very different:
- Advertising Spend: $500
- Initial Sales Price: $100
- Sales Generated: 3
- LTV: $1000
- ROI: $2500
Now your ROI goes from $300 on a $500 spend to $3,000 on a $500 spend. All of a sudden, this ad campaign is a good buy, right? Accurately measuring your returns saves your from throwing away valuable traffic and advertising and therefore marketing dollars.
To summarize, to truly measure the success of an ad campaign, relying solely on immediate sales or Cost Per Sale is insufficient. Understanding customer behavior through metrics like Retention Rate and Lifetime Value (LTV) is essential for evaluating long-term profitability. Calculating LTV can reveal the true ROI of an ad spend, transforming seemingly unprofitable campaigns into valuable investments when considering the lifetime worth of a customer.
