What to look for when evaluating the effectiveness of advertising campaigns

Your campaign has been launched and you have impressions, clicks, and conversions. It’s time to evaluate whether this advertising campaign is effective, and, if necessary, make changes in the settings.

What metrics should we pay attention to? I will go over the basic ones that are available to most advertisers. Some of them will have to be calculated independently for each advertising campaign, while others will be available in the advertising system account or your analytics system.

I want to mention right off the bat that you should not start analyzing the effectiveness of a campaign before seeing at least a few hundred clicks, since that would be too early to draw any conclusions.

These metrics are listed in order of importance, starting with the main ones.

Let’s begin.

ROMI (Return On Marketing Investment)

ROMI is a measure of return on investment in marketing, which shows the percentage of profitability or unprofitability for a specific amount of money invested. It is calculated according to the following formula:

ROMI = ((Revenue from marketing – Cost of goods – Marketing costs) / Marketing costs) * 100

If the ROMI is less than 100%, the investment in marketing is unprofitable; if it’s more than 100%, it’s profitable.

I’ll give an example. A retargeting campaign generates sales of $24,000, the cost of goods sold was $16,000, and advertising cost was $1,800. Let’s calculate the ROMI for this advertising campaign:

ROMI = ((24,000 – 16,000 – 1,800) / 1,800) * 100 = 344%

Thus, the ROMI for the advertising campaign was 344%. That means the advertising campaign is profitable. You could also say that the campaign brought $3.4 profit per dollar invested in advertising.

In fact, if you have access to information on goods sold through each specific advertising channel, ROMI is the only metric that you will need to consider. All other metrics, like CPA or CPC (discussed later in this article), are only secondary, and you don’t even have to pay attention to them at all.

To learn more about the ROMI metric and its variations, read my previous article: Evaluating the effectiveness of advertising campaigns: ROMI, ROI and ROAS.

ROAS (Return on Ad Spend)

ROAS is a measure of return on investment in advertising. In many respects it is similar to ROMI, and it is calculated according to the following formula:

ROAS = Revenue from marketing / Marketing costs

If we take the initial data for our retargeting campaign, the ROAS will be as follows:

ROAS = 24,000/1,800 = 13

For every dollar spent, $13 was earned, which seems to be a lot at first, and we know from our calculations that the ROMI is 344%.

This metric is great for comparing advertising channels to one another. Moreover, in most major advertising systems, ROAS is calculated automatically for all the advertising channels, which makes it very easy to compare channels.

In order to understand in general terms whether a particular advertising campaign is effective or not, we need to calculate the minimum target ROAS. For example:

  • You generate $100 on average from each sale and the cost of goods is $60.
  • Profit from sale: 100 – 60 = $40
  • Accordingly, if you spend $41 on advertising, you will lose $1. If you spend $39, you earn $1. Your minimum allowable ROAS for the ad channel is 100/40 = 2.5. In other words, with a ROAS equal to 2.5, your advertising campaign will break even.

As you may have noticed, when calculating the minimum ROAS, we use the average values for the cost of goods as well as the margins. Accordingly, channel assessment based only on ROAS would work well if you were selling only a few types of goods or services with the same or similar value and margin. In this case, the probability that a particular advertising channel would lead to orders for amounts that differ from the average would be minimal.

If your nomenclature consists of hundreds or even thousands of goods, where the spread of prices is from $20 for a t-shirt to $2,000 for a sofa, the average amount of an order from a particular channel would be very different from the average order amount for the entire business. In this case, using the ROAS metric would not be suitable for comparing channels. To assess the effectiveness of a particular advertising channel, you wouldn’t need to calculate the minimum ROAS for the business as a whole, but rather for each estimated channel separately. This way you will know precisely whether the campaign is effective or not.

CPA (Cost Per Action)

This metric is most often used when working with CPA networks to determine the maximum cost that an advertiser is willing to pay for a lead/sale.

The maximum allowable CPA is calculated according to the following formula:

Maximum CPA = Revenue from sales – Cost of goods

For example, you are selling books and the average price of a book is $40, and the cost is $20. The maximum CPA is $40 – $20 = $20. Accordingly, when working with CPA networks, or when assessing advertising channels based on CPA, you should not allow the CPA to be above $20.

As in the case of ROAS, this metric should be used only for visual comparison of advertising channels, not for determining the effectiveness of each individual advertising channel.

CPC (Cost Per Click)

Cost per click is the least indicative metric for an advertising channel as it hardly speaks to its effectiveness.

For example, search advertising in AdWords is often expensive, but the efficiency level is high. In turn, advertising to your target audience on Facebook will cost less, often by several times, but the effectiveness of this advertising is much lower. Thus, advertising channels should not only be assessed according to cost per click.

Nevertheless, in some cases, cost per click is an indicator that the campaign can and should be optimized. For example, if the cost is too high and significantly different from the average for all the channels, you should pay attention to the campaign’s CTR. Perhaps, the target audience is incorrectly configured, or the advertising message does not resonate with the target audience and it needs to be changed. Anyway, CPC is only a secondary indicator, you should first of all pay attention to the return on the whole campaign, and only then to secondary parameters, such as cost per click.

A few words about conversion attribution

Regardless of which metrics you use to assess the effectiveness of your advertising campaigns, the source of your data will always be your analytics system.

The channel to which conversion is attributed depends on the default attribution model in your analytics system. In most cases this is last-click, meaning all of the conversion is attributed to the last channel with which the visitor interacted. All the other channels on the path to conversion are equated to zero.

I don’t think I need to explain how such an approach to calculating conversions can greatly underestimate the impact of some channels and overestimate others. Therefore, when analyzing the effectiveness of advertising campaigns, it also makes sense to study reports on associated conversions, which can be found in all analytics systems.

Also, if you are running display ads, such as retargeting, always consider view-through conversions. According to comScore, only 16% of all internet users click on display ads. This means that the impact of display advertising on the remaining 84% of users remains unknown.

According to comScore, only 16% of all internet users click on display ads. This means that the impact of display advertising on the remaining 84% of users remains unknown. Click To Tweet

We at Rontar have decided to look into how display advertising affects the behavior of users who see it but do not click on it. We found that in reality, display advertising, or rather, retargeting, generates 26% more conversions than we see in the analytics system.

See more details about attribution models and conversion tracking, as well as on view-through conversions and our experiment, in the article “How to Track Conversions Correctly. Six Standard Attribution Models”.

In conclusion

If you have analytics and you see your products sold within each channel, and you know the cost of these products, then the only metric that you need to assess the effectiveness of your campaign is ROMI. All the other parameters can be used as secondary means to compare campaigns, or for superficial analysis of campaigns and/or identifying opportunities for optimization.

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