The key to any profitable marketing campaign is knowing your numbers. If you don’t understand what the numbers mean, it makes it hard to determine whether your marketing efforts are turning a profit or costing you money. Understanding which channels or campaigns are performing the best is essential to allocating your marketing budget correctly and maximizing your ROI.
But for those interested in diving into the paid advertising, organic search, or social media worlds for the first time, where do you begin? After all, there are a lot of metrics, terms, and acronyms out there, and marketing analytics can be a steep learning curve.
In this blog, we’ll get you started with the basics, teach you a few common terms, and help you utilize data to start making informed marketing decisions.
Making Results-Based Decisions
The goal of understanding analytics is to make decisions backed by data. To do this, it’s important that your tracking and measurement for all of your campaigns are set up properly. You’ll also want to make sure Key Performance Indicators (KPIs) are established to track performance over time and provide targets to aim for.
This means tracking things like Cost Per Acquisition (CPA), Conversion Rate, and Click-through Rate (CTR). You can learn more about these terms in our digital marketing glossary.
KPIs will help you monitor how profitable campaigns are and whether or not you are hitting your goals. As you collect data, you’ll be able to make educated decisions about KPIs based on prior performance.
Understanding Your Metrics
Too often people get bogged down with wanting to understand all of the numbers. But really, if you can get the hang of a few simple concepts and memorize a few simple terms, you’ll be all set! Here are a few KPIs you’ll want to remember (Warning: basic math ahead!):
Conversions (Goal Completions)
Conversions are when a user completes a desired action. These can be purchases, form submissions, sign-ups, or really anything you want to track on a website. Another way of thinking about conversions is “goals.” What is the goal of users arriving at your site? What do you want them to do?
By tracking goal completions, you’re creating a foundation for all future ROI measurements. You’ll be able to tell what interests your users, what marketing tactics work, and where you may be falling short.
Rule of thumb: Conversions should be set up for all actions that move a user further down the buying cycle. A sale is the ultimate conversion, but the steps leading up to a sale are valuable to track as well.
Conversion rate measures the percentage of users that take action on your site. Out of all of the users that arrived at your site, what percent of them completed a goal? This could be a sale, email sign-up, subscription, phone call, or anything else you deem as a valuable action.
Conversion rate is a good indicator of how effective you are at persuading users to take action. Conversion rates differ across industries and channels and should be measured against industry benchmarks. The conversion rate of organic traffic might be different than that of social or paid traffic.
Rule of thumb: The higher your conversion rate, the better. In general, a conversion rate between 2% - 5% is considered average, depending on the industry.
Cost Per Mille (CPM)
Cost Per Mille, also known as Cost Per Thousand, is the cost of 1,000 advertisement impressions. “Mille” being just a fancy way to say a thousand, CPM essentially means: How much do I have to pay to get a thousand impressions?
Rule of thumb: In general, a lower CPM is better as you are able to reach more people for less money. However, reaching the right people is more important than simply reaching more people.
Cost Per Acquisition (CPA)
Cost Per Acquisition is the cost of acquiring a user. It’s how much you spend to get a user to “convert” or complete an action. This action could be a form submission, app download, or even a newsletter sign-up. CPA is similar to CAC (Customer Acquisition Cost), which measures the cost to acquire a paying customer (See CAC below). The formula for calculating CPA is:
CPA = Total Cost / Total Conversions
For example, if you spent $500 on Google Ads, and received 25 conversions (this could be purchases, form submissions, etc.), your Cost Per Acquisition would be $20. It cost $20 to get each user to complete an action.
Rule of thumb: In general, CPAs vary greatly across industries. If you’re selling more expensive products, you can afford a higher CPA. Establishing a maximum CPA goal by campaign can be helpful for determining a benchmark KPI. With your benchmark set, you can then look to lower your CPAs through optimization.
Cost Per Click (CPC)
Cost Per Click is fairly self-explanatory, it’s the cost of one click on your ad. The cost of a click is determined by the competitiveness and quality score of the keyword and the relevance of the landing page. A company with a more expensive product or higher value lead might be willing to pay a higher CPC than a company with a less expensive product or lower value lead.
Your CPC is influenced by your CPA and conversion rate:
CPC = Cost Per Acquisition x Conversion Rate
For example, if your CPA is $20, and on average 5% of users convert, the CPC you would expect to see is ($20 x 5%) $1.
Rule of thumb: In general, the lower your CPC the better. By working to lower your CPA and improve the conversion rate of your website, you’ll see lower Costs Per Click as a result.
Return on Ad Spend (ROAS)
Return on Ad Spend measures how much return you get from every dollar you spend on advertising. In essence, it measures the effectiveness of your advertising efforts. It adds up all the revenue you receive from ads and divides it by the amount you spent on ads.
ROAS is different from CPA in that it measures how much money you are making, rather than measuring how much you are spending for a customer to complete an action (which might not even be an action that results in revenue).
Here’s the formula:
ROAS = Revenue from Ads / Cost of Ads
For example, if you spend $500 on ads and make $1500 in revenue from customers, your ROAS would be ($1500 / $500) = 3.
Rule of thumb: The higher your ROAS the better. Your ROAS should ideally be greater than 3. In other words, for every $1 spent on ads, you should be making at least $3 back.
Customer Acquisition Cost (CAC)
Customer Acquisition Cost measures how much it costs to acquire a new customer. It’s how much you spend to get a paying customer. It’s not a potential customer (lead that fills out a form), it’s an actual customer. Here’s the formula:
CAC = Cost of Marketing / New Customers Acquired
For example, if a company spent $10,000 a year on Google ads, $5,000 on social media ads, $10,000 on marketing agency fees, and $2,000 on magazine ads and acquired 540 new customers, their CAC would be:
($10,000 + $5,000 + $10,000 + $2,000) / 540 = $50.
This company is paying $50 to acquire a new customer.
Rule of thumb: Your Customer Acquisition Cost should be less than your Customer Lifetime Value (CLV). In other words, you should be spending less to acquire a customer than what they are worth to your company over their “lifetime” as your customer.
Customer Lifetime Value (CLV)
Customer Lifetime Value is the value of a customer to your business over their “lifetime” of being a customer. For example, if a customer is a repeat customer, buying multiple products from you annually, their lifetime value to you is going to be greater than someone purchasing a product once.
If you’re a service-based business, use a subscription model, or routinely get multiple purchases from your customers, then in theory, you’ll be able to spend more to acquire that customer. Of course, how much a customer spends with your business and how long they last as a customer varies greatly. The formula for CLV is:
CLV = Customer Value x Average Customer Lifespan
To determine Customer Lifetime Value, you’ll first need to determine Customer Value and Average Customer Lifespan which includes understanding a few other metrics:
Average Purchase Value
Average Purchase Frequency
Total Number of Customers
Sum of Customer Lifespans
Here is a great resource from HubSpot on calculating Customer Value and Average Customer Lifespan with equations for each metric, while this blog on marketing your makeup brand is a great example of taking CAC and CLV into consideration.
Rule of thumb: A good ratio for CLV is 3:1. Your Customer Lifetime Value should be three times greater than your Customer Acquisition Cost (CAC). In other words, if you’re spending $50 to acquire a customer, that customer should have a CLV of at least $150.
Finding Your Most Effective Campaigns
With these metrics in mind, you can then look to find your most effective campaigns. Hopefully, you can see how many of these terms relate to one another…
How much you are spending on an ad click affects how much you are spending on total ad costs.
How much you are spending on total ad costs affects your cost per acquisition and your return on ad spend.
How much customers spend over their “lifetime” as your customer affects your customer lifetime value.
How much lifetime value you receive from customers affects how much you can spend to acquire new customers.
In a multi-channel marketing strategy, you’ll want to know the effectiveness of each channel, and the value being driven. Some channels might be intended to drive sales, while others might be intended to drive brand awareness. Nevertheless, understanding your KPIs, and the metrics that matter, can help you decide which channel to focus on, or which one to drop.
Find out how many customers you are receiving through each channel and hone in on the ones bringing you the most cost-effective customers.
Calculating Your Return on Investment
Finding your overall return on investment from marketing efforts is essential to know if your efforts are effective, or wasting your money. There are a lot of factors to keep in mind for calculating your marketing ROI, but the formula boils down to two basic things:
Gain on Investment
Cost of Investment
Return on Investment = (Gain on Investment - Cost of Investment) / Cost of Investment
Let’s take a look at each of these.
Gain on Investment
How much did you make from your marketing efforts? As you probably expect, figuring out how much you made from specific marketing efforts can be difficult to calculate. How do you know if that customer you acquired was because of your Google ad, social media post, or direct mail flyer? This is where attribution in marketing is essential to understanding which channels are leading to conversions and new customers.
For e-commerce websites, this might be easier as you typically can see how a customer arrived at your website and which channels lead to purchases. For service-based businesses, this might mean tracking which channel leads to acquiring a lead, but will also require follow-through in tracking which leads turn into paying customers.
Cost of Investment
How much did you spend on your marketing efforts? This number is easier to calculate as it involves adding up all expenses for your marketing efforts. If you are looking to calculate your overall marketing ROI, this would be adding all expenses for all marketing channels, whereas if you wanted the specific cost of one channel, you’d add expenses specific to that channel.
One thing to keep in mind is that this also includes salaries paid to employees, fees or retainers paid to outside marketing agencies or freelancers, marketing tools or software, as well as any advertising fees. Where your ROAS measures how much return you get from advertising costs, it does not include other costs like salaries or agency fees.
Achieving Your Marketing Goals Through Understanding Analytics
As you find your ROIs for each channel you are utilizing, you’ll begin to get an idea of what works and what doesn’t. In order to achieve your marketing goals, it’s essential to have a good understanding of some of the metrics and numbers that can be used to determine the health of a marketing campaign.
The best digital marketing strategies come from a data-backed understanding of what has worked and not worked in the past. You’ll be able to plan more strategically for the future by understanding your best ROI drivers.
This article was co-written by Max Allegro, Sr. SEO Strategist, and Lauren Freeman, Sr. Paid Media Strategist at Intuitive Digital, a digital marketing agency in Portland, OR, in collaboration with Avenue Agency for the Combating Digital Bias project.