How can you find out whether your digital marketing strategy is actually effective or not?
By paying special attention to key performance indicators (KPIs).
They are useful for monitoring the success (or failure) of your digital marketing activities.
Let’s start by analyzing the simpler KPIs.
Then we can delve into the more complex ones.
It’s important to monitor both if you want to find out how well your strategy is working:
Click-Through Rate | CTR
CTR is a digital advertising metric that is calculated by dividing the total number of clicks an ad receives by the total number of impressions and then multiplying that by 100.
This gives us the percentage of the total clicks in relation to the number of times an ad was shown.
Unlike CPM (cost per thousand impressions), CTR tells you how much impact the ad itself has had on prospects (since it wouldn’t be very useful to have thousands of impressions of an ad that users are not clicking on.
Remember that every click means a visit, and visits convert into the leads that you can turn into customers.
Cost Per Click | CPC
Cost per click is the amount charged by digital advertising platforms, such as Google AdWords or Facebook, each time a user clicks on an ad.
You can calculate it by dividing the total expense of the campaign by the total number of clicks.
This metric is useful to find out which digital media are offering the most convenient CPC-CAC (the customer acquisition cost ratio), which also ensures a good return on investment.
Cost Per Action | CPA
This metric is becoming more important for advertisers searching for a model that allows them to pay for certain actions only.
These actions could be conversions, signups, forms filled out, or even purchases.
So when we talk about CPA, we’re referring to the total average cost of the desired action we’d like the user to perform.
The way to calculate it is by dividing the total campaign cost by the number of actions completed.
Keep in mind that even though the CPA is usually more expensive than a CPC model, it focuses on profit, so the ROI can be more favorable with this model.
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Quality–And Quantity–Of Monthly Acquired Leads
This metric is crucial because leads are what keep your business up and running.
As you may already know, the sales funnel in digital marketing works like this:
- you attract traffic or visitors to your landing page, website or blog, etc.
- then you convert those visitors into leads and a fraction of them will convert into new customers.
What does this tell you?
Yes, the more leads you generate, the more sales you’ll get.
Ok, now I would like to clarify some important factors:
- the quality of your prospects will always be more important than the quantity
- your industry and the demand for your product or service also determine the number of leads you’ll get.
Also, you shouldn’t let the quantity of leads surpass the capacity of your sales team.
What’s the point in generating 300 leads per month if you only have two sales representatives that can follow up on half of them?
Always go for quality over quantity.
Quality prospects fulfill certain criteria.
For example, they are decision makers, your product or service fits their budget, they belong to a specific industry you’re targeting, etc.
This is where the term lead scoring is important. It helps you assign a numerical value to the variables and attributes you want.
The conversion rate is a fundamental digital advertising and marketing metric.
It tells you how many of the leads generated by your advertising or digital marketing strategy actually became current customers.
It’s quite easy to calculate: you need to divide the total number of prospects generated by the number of clients you obtained from that same prospect database, then multiply that by 100.
You can also calculate your visitor-prospect conversion rate. This tells you how many of the visitors that landed on your website became contacts or prospects for your business.
For e-commerce, you could even calculate the percentage of visitors who made a purchase online (customers).
So, as you can see, the conversion rate is based on the variables you wish to measure.
Knowing your conversion rate helps you find out whether the traffic and prospects you generate using your marketing or digital advertising campaigns are qualified or not.
It also tells you whether or not you’re segmenting well, making an impact on your targeted audience, on the right media platform, etc.
These are all things you can adjust.
My advice is that you find out which sources of traffic are bringing in the most visitors that convert at a higher rate, so you can invest most of your budget in generating more of that traffic.
Solutions like Adext AI make it easy for you with the application of Artificial Intelligence and Machine Learning to digital advertising. This tool finds the best audience or demographic group for any ad and automatically manages its budget across 20 different audiences, achieving an average of +83% more conversions than any campaign in just 10 days.
The software optimizes each ad several times a day over multiple platforms (Google AdWords, Facebook, and Instagram) and guarantees its partner agencies that it will get a better cost per conversion (lower cost per sale or cost per lead) for all the agency’s accounts and campaigns, or the service will be free, and no management or optimization fees will be charged.
This guide is the perfect place to start if you’d like to learn more about this audience management tool.
And remember, if you want to make sure your advertising is an investment these other articles might be right up your alley:
- This Is Why Online Ads Are a MUST For Your Digital Marketing Strategy
- Is Your Advertising Spend An Investment? Find Out Now!
- Advertising Is Not The Same Anymore. Find Out What’s The New Hype
The Percentage Of Customers That Come From Your Digital Marketing Strategy
This ratio tells you the percentage of customers that have been generated by your online advertising or digital marketing activities.
It’s simple to calculate.
You just need to identify how many customers were generated by your advertising or digital marketing efforts during a specific period of time and compare that with those that didn’t come from your online marketing activities.
Return On Investment | ROI
This metric provokes an indescribable feeling in all marketers.
A return on investment is what we’re looking for when we invest in online advertising or digital marketing.
It tells us how effective our strategy is.
It scares us to think that maybe the actions we’re implementing are expenses, instead of investments, and the only way to be sure this isn’t the case is to calculate the ROI.
By measuring the return on investment, we know whether our efforts were profitable and if they benefited the business or not.
If they weren’t and didn’t, we can modify or reinforce our digital marketing strategies to improve the situation.
To calculate your ROI, use this formula:
(Profits or incomes generated – investment costs) / investment costs
If the result is positive, congratulations! You have gained profits and recovered your ROI.
If it’s negative, well, you haven’t…
Let’s look at an example.
Imagine that, after implementing your digital marketing campaigns, you obtained $600 USD of profit and you invested only $100 USD.
(600 – 100) / 100 = 5
This means that for every dollar you invested, you gained 5 back.
If you’d like to use percentages, multiply it by 100%.
So in the previous example, your ROI would be of 500%.
CAC | Customer Acquisition Cost
The CAC is a measurement that tells you how much it costs you to acquire a new customer.
Obviously, the objective is to ensure that the cost of customer acquisition is lower than the lifetime value of that client for the company (See LTV/CLV in our glossary).
The way to calculate your CAC is by dividing your total digital marketing investment for a specific period by the number of clients you’ve acquired during that same period.
So if you invested $15,000 USD on marketing during the first quarter of the year and generated 100 clients during that time, CAC would be $150 USD.
And if it is costing you $150 to acquire a new customer, that customer should have a lifetime value of over $150 so you can recover the investment.
LTV | CLV | Customer Lifetime Value
The customer lifetime value (CLV) is the total amount of value a client generates during the time he or she remains a customer.
If you consider that the likelihood of selling to a new client is usually between 5 and 20%, and the probability of making a sale to a customer that has already purchased from you increases to 60 or 70%, you can see how important it is to simply retain your current customers.
By measuring the total profit that customer provides over the course of the whole customer relationship, you’ll be able to work out exactly how valuable they are for your business.
- The average amount a customer pays per purchase
- How many times on average a customer pays for our product or service over the span of one year
- The average number of years the customer remains a customer.
To get the most accurate result using this formula, the average amount spent should be net.
There are more complex formulas that take other more specific factors into account.
So if this formula doesn’t evaluate all the variables involved in your business, there are lots of others online that can give you a more precise result.
CAC – LTV relation
What’s interesting about these two KPIs is how you can use them together.
For example, if the CAC is $250 USD, you’re offering a recurring service for $50 a month, you’d need to retain the client for at least 5 months to recover your investment.
And if the average customer lifetime was 3 months, the CAC would be higher than the expected profit… so your marketing strategy wouldn’t be profitable.
This is the metric that tells you how many customers canceled their payments or failed to renew their subscription to your service.
Logically, this only metric only applies when you charge your clients on a recurring basis.
The easiest and most basic formula for calculating your churn rate is by dividing the number of lost clients during a period of time by the number of clients you had when that same period started.
For example, if 5 clients canceled their subscription to your service and you originally had 200, your churn rate is 2.5%.
As you may have noticed, the time factor is very important with this formula.
The usual thing to do is to calculate it monthly. However, you could calculate it every three or six months.
And… we’re done.
If you managed to read up to this point, congratulations!
Now you know the most important KPIs that you should monitor for your online advertising or digital marketing strategy.
If you focus on analyzing and optimizing the KPIs we just explained, rest assured that your digital strategy will be a definite success and your ROI will be more than guaranteed.
Now tell me, do you know any other KPIs or metrics that are important to measure?
Don’t forget to share them in the comments below, to help others grow their businesses, too!