Search Marketing Metrics
Whether you’re working in-house, at an agency, all by your lonesome, or for your own business; it’s important there’s a general sense of direction for your campaigns. If that direction revolves around conversions, this post will hopefully help you or your client out.
There are three essential metrics for conversion-focused search marketing:
1. Cost-Per-Action or Cost-Per-Acquisition, also known as CPA
2. Return on Ad Spend, or ROAS
3. Lifetime Value, sometimes shortened to LTV
Deconstructing the acronym, we can see that this metric simply looks at the cost of getting someone to take a desired action. As a Search Engine Marketing specialist, we will consider CPA’s role in Pay-Per-Click (PPC) campaigns.
Step 1: Calculate your Cost Per Lead
A simple calculation of your CPA is the total amount spent on PPC divided by the total amount of conversions in the same time period.
$1,000 cost ÷ 100 leads = $10 cost per lead
Step 2: Calculate Your Cost Per Acquisition of a Customer
Next, to determine your cost of acquiring a customer, you’ll ask your sales team how many of these leads actually become sales. Perhaps they say 10% or 1 in 10 of your conversions produce a sale.
Leads (100) x closing ratio (10%) x cost per lead ($10) = $100
Step 3: Estimate Your Budget
Next, to estimate your monthly PPC budget, we take the cost of acquiring a customer, $100, and multiply this by how many customers you need per month. Example, if you need 25 conversions that result in a sale; then your budget should be at least $2,500 per month.
Desired conversions (25) x cost per acquisition of customer ($100) = $2,500
With the average cost of obtaining a customer at $100, we can now analyze how to optimize our CPA.
Is this CPA too high?
Even if it’s not, it’s always advantageous to lower your CPA. Here are 4 quick tips:
1. Look at the queries your ads are being triggered by. To do this, run search query reports. If your CPA is too high, it is likely that there are irrelevant queries triggering your ads and costing you clicks that you can exclude by making additions to your negative keyword lists.
Look for relevant queries too—there could be opportunities for new keywords that will allow you to hone your targeting.
2. Give your ads the quality time they deserve. After all, you are aiming for a high quality score. Use the search query reports you have run to create both compelling and relevant ad copy that caters to the terms your searchers use. Use multiple variations of ads to test for what works and for what doesn’t.
Improving the caliber and relevance of your ads will improve your click through rate and quality score, which in turn will lower your CPA.
3. Make your landing pages somewhere a person would want to land. If a potential customer has entered a search, seen your ad, and clicked it, then you know what information they are expecting; provide the searcher with the details that will make them want to convert. These details are best served on a page that is dedicated entirely to a single offer, whether it is a product or service.
Your ads make use of intelligent targeting; do not fail the sale with a generic landing page.
4. After you’ve focused on improvement, it is time for bid adjustment. Conduct CPA calculations using information from specific ads. If they’re underperforming, adjust bidding for a click value that will meet your CPA goals. Scripts, templates, and other tools might help you adjust your account’s bids at scale.
Return On Ad Spend
If you’re on the E-commerce side of things, you’ll know from your tracking how much each customer’s unique transaction is worth. A good way of focusing your E-commerce PPC strategy is considering your return on ad spend (ROAS).
Using your tracking data for the past month, you can get a general idea of your ROAS by dividing revenue by ad spend:
Revenue ($3,500) ÷ Ad Spend ($2,500) = $1.40
Your ROAS is $1.40 for every $1 spent.
Improve Your ROAS
Here are 5 tips for ROAS improvement from our most familiar medium, Google’s Product Listing Ads (note that the 4 tips provided for CPA are applicable to ROAS as well):
1. Consistently update and synchronize your data feed with AdWords. I suggest letting AdWords automatically fetch your data feed so as to avoid errors that might impact sales.
2. Do not forget about negative keywords. Although shopping campaigns do not use conventional keyword targeting, negative exclusions are still essential. Neglecting to conduct search query reports for your shopping campaigns can result in wasted ad spend as ads are served to irrelevant queries.
3. Structure your account. Segment your campaigns by products so that you can manage your bidding and budget effectively for each product. Consider different target ROAS for different products.
4. Lower bids on poor performing products. Monitor your reports for the products that are far above and beyond your target ROAS.
5. Increase bids on products that are below your target ROAS. While spending more money might seem like the enemy here, getting more exposure for your most profitable products is never a bad thing.
Uh Oh, We’re Missing Something
The issue with the previous calculations is that we have based them on the short term. We have also assumed that every customer is equal. Customers come in all shapes, sizes, spending patterns and levels of loyalty. We have to keep in mind that these initial CPA and ROAS calculations aren’t looking at what these customers are going to do in the future. Our calculations have only considered a short one month cycle.
Earlier, our ROAS calculation came to $1.40 for every $1 spent. You might have said that this was far too low, but you have to remember that the revenue here is only from the first purchase these customers make. These customers are most likely not going to be browsing PPC ads for your products the next time around. The second, third, fourth and however many more purchases are not being factored into your initial ROAS calculation. Once you start considering purchases made beyond the monthly cycle, you can see how only considering ROAS on a month-to-month basis can make your PPC look less successful than it actually is.
Lifetime Value of a Customer
Our earlier short-term issues with CPA and ROAS can be analyzed and potentially remedied with our third metric, Lifetime Value or LTV. Lifetime Value is a prediction of the net profit attributed to the entire future relationship with a customer.
Thinking about LTV requires a shift from a month-to-month value based ideology to a long-term vision. The lifetime value cycle of an e-commerce customer is typically 1 year. Lead generation or subscription-based services might have longer cycles.
Most big advertisers are aware that only using a monthly target CPA is short sighted and limits marketing success. Being able to harness the valuable information LTV supplies will allow your business to make informed and intelligent decisions on what your target CPA or ROAS should be. Knowing this will help you decide how to divide your account’s focus.
Step 1: Calculate LTV
The basic formula for LTV is multiplying your average monthly revenue per customer and gross margin per customer, and then dividing that by the monthly customer churn rate.
(Avg Monthly Revenue per Customer x Gross Margin per Customer) ÷ Monthly Churn Rate = LTV
Let us figure out how to get our churn rate first (in case it’s unfamiliar). Churn rate, or the rate at which customers are lost in a certain period, is the opposite of retention rate, or the rate at which customers are retained in a certain period.
(Customers at start – Customers at end) ÷ Customers at Start = Churn Rate
If a company has 1000 customers at the beginning of the month and only 900 at the end of the month, the churn rate calculation for the month would look like this:
(1000 – 900) ÷ 1000 = 100 ÷ 1000 = 10% Churn Rate
You can find you retention rate with your churn rate as well.
1 – Churn Rate = Retention Rate
Now let us look at an example for a LTV calculation. If a company makes $50 per month from a customer with a gross margin of 30% and a churn rate of 10%, the lifetime value of that particular type of customer would be $150.
($50 x 30%) ÷ 10% = $150 LTV
Broad sweeping calculations like this are helpful for a general idea, but I advise you to segment further. Here’s some more information on customer segmentation. Look at different LTV for different types of customers, different product buyers, service subscribers, etc. The closer you get to the specific consumer the more you’ll understand their specific LTV, and this is extremely helpful for your future marketing efforts.
Important: Figuring out the average value of your customers will require long-term tracking which not only tracks search marketing conversions but organic and offline conversions as well. Getting the long-term picture can be a difficult task if tracking is not set up between the divisions of your business, i.e., a customer might click an ad, buy, visit a few months later organically, buy again, phone order the month after that, etc. Different departments will have information on the customer and putting it together to get a sense of long-term habits will help your LTV calculations.
Lifetime Value Resources
If you’re still not convinced about the importance of LTV, this article by David Skok might help. In it he explains that one of the top startup killers is the neglect of LTV.
For an in depth visual, see this infographic on Starbucks LTV.
Another great article, by Avinash Kaushik, discusses the minute details of effective LTV calculations that are inspected with the help of his friend David Hughes. Check out the article for more great insight on the mechanics of LTV.
Included within the article is a handy excel download of Detailed Lifetime Value Model that you can work with yourself.
From Google AdWords to Bing Ads, knowledge of the lifetime value of your customer can only aid in the effective management and optimization of your PPC account. With accurate LTV, you can confidently set targets for CPA and ROAS, forecast your PPC budget, and optimize for the most valuable kinds of conversions.
About the Author
Steve is the founder of Vantage Search Marketing, a Vancouver based online advertising agency specializing in PPC management. With over 7 years of internet marketing experience, Steve has overseen the development and implementation of countless PPC campaigns.