Why establishing a digital marketing KPI is important
Digital marketing can be an effective way to grow your business. It’s not unreasonable to be so excited you want to just dive in without much planning and set up a Google Ads or Facebook (now Meta) campaign to see what impact those efforts can have. However, a critical part of any marketing campaign – and especially digital marketing – is to understand key benchmarks and set clear goals for what you want to achieve. This allows you to effectively evaluate performance and understand whether the ads are helping your business.
Digital marketing KPIs are also an important way to determine the budget level you want to use for various ad platforms. If you’re seeing strong results, it often makes sense to increase the budget. The inverse is also true if you’re seeing lackluster results. But how do you know what constitutes strong or poor results? You need a clear KPI goal that’s well-thought-out and appropriate for your business and your marketing goals.
This post will walk through some different ways of thinking about how to go about establishing a top-level digital marketing KPI goal and what you’ll need to do that.
In some cases you may have certain campaigns or channels that support awareness or upper-funnel goals. For example, a top-of-funnel campaign might be designed to attract readers to a blog which then adds them to remarketing channels. However, we won’t be covering goals for those types of campaigns in this post.
Different approaches for setting digital marketing KPIs
We’ll walk through three different approaches to use as a way to establish a KPI. The appropriateness of each will vary based on your business and goals. Those approaches are the Cost per lead, ROAS, and Lifetime value.
Cost Per Lead
Let’s start with Cost per lead (CPL). This can also be referred to as Cost per acquisition (CPA). If you’re a business that is leveraging digital marketing to drive leads for your business, this is probably the approach for you. This can include local businesses like HVAC companies all the way up to large B2B companies. What’s important here is understanding what a qualified lead is worth to you and to do that you need to work backwards.
Let’s start with a basic example. Say your company makes $500 on average for each sale. And for every new lead you get, 10% convert into a sale. That means that you can spend $50 ($500 x 10%) in marketing costs to get that lead. Another way to think about this is if you get 10 leads, 1 of those (10%) will become a sale which is worth $500 to you. That means the most you’d want to pay for those 10 leads is a total of $500 or $50 per lead. As a result, you should set your KPI at a $50 cost per lead.
Return on Ad Spend (ROAS)
For ecommerce-oriented campaigns, the sale generally will take place on your website. In these cases, what you want to evaluate is Return on Ad Spend (ROAS) calculated as Total Revenue/Total Ad Spend. A common benchmark for businesses is a ROAS of $3.0 which means you’re making 3x in revenue what you’re spending on digital marketing. An example would be spending $1000 on Google Ads to drive $3000 in sales revenue from your online store. That would be a ROAS of $3.0.
The right ROAS goal will vary based on your business’s unique situation including information like margin, cost of goods sold and overhead figures. Something closer to $5.0 or $7.0 ROAS goals might make more sense.
A more advanced way to think about digital marketing KPIs is using lifetime value data. In this approach you’re taking a longer-term view and leveraging customer data to understand what a new customer is worth to you over the course of the relationship. Depending on the nature of your business, this may not be a viable approach. However, if your business is focused on acquiring new customers that often make multiple purchases or produce subscription-based revenue, this is definitely something to work towards. The key is having the customer data to calculate what the average lifetime value of a new customer is worth to you.
Let’s say a new customer produces $100 in revenue initially and then $50 each month for an average of 10 months after that. If you just used a simple cost per acquisition approach, you might think the most you could pay for a new client is $100. However, using lifetime value data, you can see that the average new customer is actually worth $600 to you ($100 + ($50 x 10) = $600) which means you could actually pay quite a bit more than that for each new customer and still come out ahead.
Lastly, let’s consider an instance where two different KPI approaches may make sense for the same business. For an ecommerce business, the best KPI would generally be Return on Ad Spend (ROAS). That KPI makes sense for channels like Google Shopping where you’re trying to maximize sales revenue. However, let’s say you want to test running ads on Meta (formerly Facebook). As that’s more of a high/mid funnel channel, you’re probably going to be focused more on obtaining new customers rather than sales revenue. In that case, you should consider using a Cost per acquisition (CPA) approach instead of a ROAS goal.
Establishing the goals that you need to meet for paid media advertising to be successful for your business is the right foundation for planning and evaluating a paid media program. And it’s also key to optimizing campaigns. Sophisticated marketing programs set different KPIs for different product lines, geographies, and audience targets, all of which give you different ways to compete in crowded markets as well as improve profits from products sold. There’s a lot riding on the accuracy of tracking to your KPIs, which is why marketing analytics is at the heart of digital marketing, and a huge emphasis at Two Octobers.