August 08, 2016 | in Paid Search & Media Buying

Don’t Kill Your Sales With The Wrong Efficiency KPI

Right metrics to improve your performance

If you’ve been having trouble hitting your PPC Key Performance Indicator (KPI) for the business, or if you are hitting it but you’re not sure why you’re not seeing growth, this could be because you’re working towards the wrong metric.

Getting the right measurement for your sales target together with the right top-level number can transform your performance.

What efficiency KPI is best for you?

Here’s a basic outline of what options you have:

ROI: The amount of money you have made from your ads divided by the money you have spent on them. You come out with a ratio (e.g. $200,000 revenue ÷ $80,000 ad cost = ROI of 2.5)

Cost of Sale (CoS): Essentially the same equation as the above but reversed (spend divided by Revenue) and is a percentage number.

Gross Margin: The profit percentage made from selling a product or service after deducting expenses (e.g. manufacturing costs) often called “Cost of Goods Sold” or COGS before you deduct the cost of ads. This can be used in lieu of outright revenue in the above two metrics for a more restrictive (but technically more accurate from a bottom line perspective) efficiency figure.

Cost-Per-Action/Acquisition (CPA): The average amount of money spent on advertising needed to see a conversion (or specific action).

Cost-Per-Lead (CPL): The average amount of money spent on advertising in order to generate a new lead.

Lifetime Value (LTV): The specifics of this can be calculated in a number of ways but it essentially is the financial value of a user over the long-term, not just the first conversion. The customization of this number can be through if you want to factor in costs, the timeframe you choose to use and whether there is a fixed or ongoing period of relationship with the customer. This too can be used as a substitute for Revenue in the efficiency metrics.

Decision

For many businesses, it’s better not to just look at one number. If you do, you risk harming yourself in another metric. For instance, beating a CPA target is easy, you can do that in a heartbeat but doing it this way will mean you reduce your total volume. The hard part – the bit that draws on expertise – is to both reduce CPA and grow conversion volumes (or revenue).

The other part of choosing the efficiency metric, is hugely dependent on what your business is, it’s business model and the pattern of its profitability. In other words, ask yourself:

  • Do I sell a small or large range of products?
  • Are the price points across the products a wide or narrow spectrum?
  • Are the expenses I incur hugely variable from product to product?
  • How likely is repeat business?
  • How long is the buying decision process?
  • How well known is my brand?
  • How predictable is my profit margin?

The more static your margin numbers and product range, the more suitable the likes of CPA will be. The more variable the Average Order Value (AOV) or customer lifetime length could be, the more likely ROI/CoS will make sense. But even then, a single, top-level number might distort your account development and it may be better to stick to product category-level (or your business’s equivalent) efficiency targets instead.

If you are going to go for an ROI or CoS target, then ideally you will not have a marketing budget limit. Profitable is profitable and if you’re beating ROI targets, then by definition, you’re making money on whatever you have spent, be it $100 or $1m.

Analysis

So you need to weigh up what level of efficiency metric you want to use as a target but which also does not need to compromise your growth potential. If your PPC account has been running for long enough, you might just have the data to identify this magic nexus.

Use as many data points as you can and set up a scatter chart of Revenue (or gross margin) by CPA/ROI/CoS/ROI/CPL and see what patterns you get. You will probably want to look at Spend vs efficiency in the same way for other reasons.

It’s possible you’ll see a place where revenue plateaus or peaks at a range of the efficiency metric before you see diminishing returns. But beyond this, you can use the data you have to see what the increment costs are of getting incremental revenue/sales by using your real world data and Google’s budget and bid estimation tools.

Careful

However, there is another approach to metrics that is too easily overlooked. The volume can grow or be fine but the efficiency is worse – but the account is not actually performing worse. We explain this little conundrum in this blog post.

Knowing this could also help you choose target numbers as well as the KPI you want to aim for.

Do you have more questions about how to choose the correct efficiency KPI for you? Tweet at us @ESV_Digital_UK or follow us on LinkedIn.

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