Robust ThemeDec 09, 2019 2020-04-08 7:40
Overlooked Metrics When Setting Paid Ads KPI’s
We’re going to touch on 4 variables that are often overlooked by business owners, media buyers, and or agencies managing paid ads.
Running ads post iOS 14.5 has obviously thrown a curveball into attribution specifically within the platform itself, and has created an environment where pinpointing true performance is quite difficult without 3rd party tracking such as the Triple Pixel by Triple Whale. Analyzing these 4 variables to lead your decisions on the ads side is crucial to not only have an approach that is in line with overall business health, but to mitigate misguided decisions as a product of poor attribution across the board. Even with perfect attribution, these variables are crucial to scale sustainably, and profitably.
Variable costs should be used to identify appropriate CPA targets alongside LTV data for optimal growth. Think COGS, credit card processing fees, shipping if you incur those costs, etc. Identifying your gross margins here will allow you to map out your breakeven CPA, as well as your margin at different CPAs.
Now if you’re a business that relies heavily on LTV and can stomach acquiring customers at a loss this will allow you to map out at which point after you’ve acquired a customer you break-even, and when you start profiting from a gross margin perspective.
This is an often-overlooked piece of information when running paid ads. This is more relevant for businesses that are in the early stages. We often see young e-com businesses setting acquisition KPIs in relation to the present economics of their business and setting CPA targets based on their current fixed costs as a percentage of overall revenue.
Naturally, if you have high fixed costs in relation to your overall revenue (which most young e-com businesses do) you’re going to need to acquire customers at a significant margin to make things look good on the books at that given time. If you have the team and resources to scale without having your fixed costs scale linearly with growth, then there are often significant economies of scale that can be achieved.
Take a look at the example spreadsheet below that we make for our Growth Package clients to map out their economies of scale, and to understand at different levels of spend the revenue along with holistic full-funnel ROAS needed to be X% profitable. By mapping this out, it gives a clear picture of the benefits that come with scale.
The point is, in the early stages it’s very easy to set unrealistic ROAS targets because you think that’s what you need to achieve. When in reality, what you actually need to achieve is economies of scale, and to make your fixed costs a lower percentage of your overall revenue.
Arguably one of the most important metrics of all in e-com!
Understanding this metric as a media buyer is absolutely crucial. As you get to higher spend levels, you’re likely to see a drop in ROAS and or an increase in CPA. One of the ways to counteract this and understand if your growth is sustainable is to analyze your LTV in conjunction with your acquisition metrics.
LTV is interesting, as it naturally implies “lifetime” which is not the most practical way to look at this metric. You want to analyze LTV on specific timeframes in order to better understand your break-even point and when you make money on shorter time frames which are important to understand again if your growth is sustainable. A business that is financing an acquisition may be able to wait 12 months to make their money back. However, most e-com businesses are looking at hitting their profit goals on shorter timeframes such as 30,60,90.
In media buying, profit is often assessed solely on the acquisition of a customer, and business-wide profit is often overlooked.
Let’s say you’re scaling acquisition super aggressively and are only achieving a few percentage points of margin on the customers being acquired. Perhaps because of this influx in new customer revenue, your return customer revenue decreased from 25% of your overall revenue to as low as 10%. All of a sudden despite the fact you may be pleased with your paid ads performance, your net margin may have decreased significantly as a product of this. What can happen here is depending on how your inventory terms are set up/how you invest in inventory your top-line growth may be outpacing your bottom-line growth. This means you eventually will not be able to keep up with your inventory investments to accommodate the growth trajectory.
Of course, there are other ways to finance inventory and every business is different. This is just an illustration of how important it is to factor business-wide profit into your decision-making process on acquisition.
To learn more about the importance of these factors, watch our Youtube video on this topic here: Overlooked Metrics When Setting Paid Ads KPI’s