William Shakespeare once pondered the question: “What’s in a name?” The same question could be asked of the multitude of KPIs that modern digital marketers work with.
You have return on ad spend (ROAS), return on investment (ROI), cost per acquisition (CPA), cost per click (CPC), click-through rate (CTR), conversion rate (CVR), and many more.
The fact of the matter is that savvy marketers rely on data to hit their targets according to these KPIs, sometimes without understanding what they really mean or which is most meaningful. So let’s break it all down for you.
Consider this your cheat sheet to understanding the top marketing KPIs in 2023.
Cost per click
CPC is a great metric to analyze your digital marketing efficiency. It’s calculated by dividing the cost of displaying your digital ads (say, a display ad on the Google Ads network) by the number of times users click on it. This ratio essentially can tell us how cheap or expensive our traffic is.
However, this metric doesn’t take into account the quality of the traffic that is generated. For example, you may be able to boast a very low cost-per-click, but if the vast majority of the traffic doesn’t engage with your site, it might be money wasted.
Also read our blog post from November 2023: what are KPI's?
Let’s imagine you are marketing a luxury goods brand — maybe watches. If you are generating a lot of cheap traffic full of users who are very unlikely to result in a sale, then it doesn’t really make sense to run that ad. Rather, it makes more sense to spend more for that ad, and generate a lower amount of traffic if those users have a high likelihood of making a purchase. The anticipated high profit margin of your luxury goods affords you the ability to spend more for higher quality traffic.
So, while CPC can give you a quick view on the cost efficiency of a particular ad, you'll also need to monitor some conversion KPIs — like CPA.
Cost per acquisition
Using CPA as your guiding KPI can help your campaigns generate as many conversions as possible. Much like traffic, though, not all conversions are the same.
If we think back to our watch brand, you can imagine we might have a few models in our catalog. Some entry-level models will target customers at a comparatively lower price point than our top-of-the-line model encrusted in diamonds.
The value that each acquisition (or sale) that each model can bring are vastly different. Selling the top-line model may bring more than 10 times the revenue of the entry-level model. Most businesses may be willing to spend more over a longer period of time to sell the goods with the highest profit margin to a highly qualified clientele.
If you’re optimizing solely for CPA, you can lose sight of that nuance. Instead, you might want to look at ROAS.
Return on ad spend
ROAS is the metric on every (or at least most) marketer’s lips right now. It’s essentially ROI, but specifically for marketing. This ratio divides your revenue by your total ad spend.
In other words: how much revenue are you getting for your ad budget. Sometimes this is expressed as a percentage, other times it is presented in local currency, and in other cases it can just be a regular numeral. ROAS helps marketers determine which ads give the most bang for the buck.
While some marketers may think (and hope) that ROAS is the holy grail of KPIs that will give them the perfect insight into how they can maximize their efforts, much like the other metrics we’ve discussed, it’s not so simple. In fact, there are three main drawbacks to ROAS:
1. ROAS is decoupled from volume
Let’s imagine you’re in a marketing leadership role. Your team presents the table below highlighting that your ROAS for March hit a record high of three.
While that may seem like fantastic news, let’s take another look at that table. We can see that sales have seemed to bottom out in March with only a single conversion. It’s also been declining month on month.
And while ROAS may be at a record high, revenue appears to be a record low. Sure, you’ve only spent. $100 on advertising and hit a ROAS of 3.00, but that’s only $300 in revenue.
Focusing only on ROAS can cloud your perspective of other factors that could affect the business as a whole. Optimizing for ROAS could also incentivize your team to start sacrificing volume in the name of a good value for the KPI of the moment.
You can avoid this by also taking incrementality into account. Put simply, incrementality helps to measure the effects of additional campaigns — even when you scale or cut off advertising spend. You can learn all about incrementality in our piece dedicated to the subject.
2. ROAS focuses on short-term revenue
Another drawback to ROAS is its focus or prioritization on short-term revenue. In reality, though, the customer journey extends beyond just a single conversion or sale event. Great brands have repeat customers. And depending on your business model, you may employ some sort of subscription service.
ROAS simply isn’t designed to take these long-term sales and revenue points into account. Instead, we need to employ customer lifetime value (LTV).
LTV is the estimated total value that a single customer will spend with your business. If we think back to our watch brand, the customer relationship doesn’t end when you hand over the keys. Instead, the customer may want to buy accessories and add-ons over time. They may also want to purchase ongoing service and maintenance through your company.
All of these additional potential revenue points are averaged out based on previous and project customer behaviors to calculate LTV.
3. Road assumes perfect attribution
By the very nature of the ratio (revenue over ad spend), ROAS makes a direct connection between your ad spending and customer purchases. However, we all know that relationships aren't so direct.
In reality, customers make multiple contacts with your brand in an ecosystem of your ads, your content, third-party reviews, marketing and messaging from competitors, and a swath or price points and perceived value. And very likely, if the cost for your goods or services are higher in relation to your customer’s ability to spend, the longer their consideration time will be. That means they spend more time being affected by the messaging and ad ecosystem, making the connection between ad spend and revenue even fuzzier.
The simple fact is that we can’t attribute every dollar of revenue to specific ad campaigns — even if ROAS seems to promise it can.
So what KPIs should you be looking at?
A metric with a more holistic view
Rather than ROAS, marketers should start taking a closer look at their marketing efficiency ratio (MER). This metric looks at total revenue divided by total spend across all of your marketing channels.
Ok, yes it is similar to ROAS, but MER looks at total figures and avoids breaking down spend by channel. Plus, some organizations can go into great depth with this ratio by also taking into account internal marketing costs (like headcount).
So what should you report on?
Let’s be real, we can’t completely give up on CPC or ROAS in our reporting. They serve a valuable purpose. However, we need to report on them in context to the bigger business perspectives at play.
When reporting on CPC, make sure you connect it to conversion. When reporting on ROAS, put it in context alongside LTV and MER.
As we always mention, it will also depend on your reporting audience. Technical teams may want to focus on the gradual details like CPC, while a CMO will want to understand ROAS and how it is contributing to the long-term success of the business as a whole.
What should you optimize bid strategies on right now?
Don’t panic, and don’t throw out your entire Google Ads bid strategy just because you’re starting to have doubts about ROAS. We merely want you to take those insights with a grain of salt.
Generally speaking, for lower-funnel campaigns that have high quality data fed back into them, target ROAS is still your best strategy. There are few ways you can improve the revenue representation of ROAS, though.
To discover what they are, and to learn more about the top marketing KPIs, check out the latest Funnel Tip on our YouTube channel. And don’t forget to like and subscribe so that you can receive all the great tips you need to become a better data-driven marketer.