Profit: The Only Marketing Metric that Matters

I recently wrote about the limitations of one of the most widely-held marketing KPIs: ROAS (Return on Ad Spend). The main limitations with ROAS are that it is a measure of efficiency and not magnitude and that the efficiency it measures is revenue generation, not profit generation.

Yet creating revenues without profit, or efficiency without magnitude is not creating success, and we want KPIs that are tightly aligned with success. In fact, that is the sole purpose of a KPI.

So if ROAS sucks at being an indicator of the magnitude of profit, what KPI does work?

I’m going to go out on a limb here and say all marketing metrics are poorly aligned with business success. Which is why your marketing KPI shouldn’t, in fact, be a marketing KPI at all.

It should be a business KPI.

In fact, it should be a really specific business KPI and that is a form of profit measurement called “Contribution Margin”. Contribution Margin is pretty simple to calculate, it is just Revenue – Variable Costs. In this respect it’s a close relative of a metric we like a lot: Gross Profit (Revenue – Cost of Goods). But the key to a good Contribution Margin calculation is what’s included in the variable costs. For us, the biggest variable cost is Ad Spend. But in actuality, we also add in cost of goods and any other per-unit costs if they exist.

If it sounds complicated, you can probably simplify it. If you want to call it Post-Marketing Gross Profit that works, and in many cases may be close to the same number as Contribution Margin, depending on what other Variable Costs exist. Frankly, we find the hardest part is to get this information from clients, as it’s unusual for Marketing to know these numbers and Finance may need an explanation on why it’s important to share them.

So why is Contribution Margin a good KPI? Well, first, it doesn’t just align with the magnitude of profit, it IS the magnitude of profit. Second, if you’re looking at actual profit, a false read on efficiency can’t cause you to make bad decisions in the name of efficiency (this is called the local optima effect and I’ll post about this in the future). If you use Contribution Margin as a KPI, you actually see the drop in profit. And lastly, it lets you do two very exciting things in growing a business, and those are that the investment in marketing becomes a profit center and not a cost, AND it allows you to have a business metric that transcends channel complexity, but how that works is a topic for another time.

Why ROAS Sucks As a KPI

ROAS (Return on Ad Spend) is the industry standard for assessing and reporting the performance of paid digital campaigns, but it really sucks as a KPI.

To be totally fair, ROAS has a few strengths. It is easy to calculate (even easier than ROI): Revenue / Ad Spend. It is a relatively clear measure of efficiency. It is a metric that can be used across channels and media. But that’s about it, and when you start digging in, ROAS has a lot of limitations, including one huge killer that makes it, well, dangerous:

You can go out of business optimizing to ROAS.

And that is where ROAS really comes into its own as a sucky KPI. Frankly, I want KPIs that align with the financial health of my business and I certainly want that alignment in KPIs used for assessing campaigns we run for clients. ROAS doesn’t do that. ROAS is an efficiency metric. It has very little to do with how much money you make. This is because (like ROI) it is only a good metric when comparing exactly the same media spend. The problem is, nobody does that.

When you look at marketing reports across the industry, you will almost always see ROAS as a standard KPI, even when marketing spend changes.  And this is where the danger part comes in. ROAS works as a comparison of efficiency, and not magnitude.  An ROAS of 6 is more efficient than an ROAS of 5, but that doesn’t mean you made more money (or any money, but I will get to that). An ROAS of 6 on $10 did not make you more money than an ROAS of 5 on $10,000,000. That is a fairly obvious example, but marketers often treat ROAS as a KPI in isolation, which means you can easily reduce the magnitude of returns in the search for higher efficiency. Google even allows campaigns to use ROAS as a target for bid optimization, regardless of the effects on magnitude. Ponder that for a moment. And while it seems crazy, we have seen marketers make the decision to optimize for ROAS, opting for efficient returns even when the magnitude wasn’t enough to make payroll and keep the lights on.

Which brings us to the second danger with ROAS which is that it is based on top-line revenue, and not profit. This is why you can have positive (>1) ROAS and still lose money. This can happen when the efficiency of the return isn’t enough to cover costs. Unfortunately, many marketers aren’t given deep enough financial information to know whether campaigns are profitable or not. They just have this one metric which will only ever tell them if campaigns are so grossly inefficient that they aren’t even covering revenue. Again, I want metrics that alert us when we are even slightly less profitable, and not just when the bus is so far off the road that it is lying at the bottom of the canyon.

So what’s a good metric? Total post-marketing profit (aka Contribution Margin), which I will cover in an upcoming post.

5 Marketing Data Mistakes Most Companies Make

Even the most data-savvy of marketing teams can make mistakes in thinking about the use of data in optimizing campaigns for financial success. Let’s face it, marketing data is rife with issues and is never perfect, and it is easy to put on blinders based on the data you have available, the systems you use, the marketing channels you work with, or even the directives of senior executives. Despite that, everyone wants to be able to connect the dots from ad impression to profit. Here are a few common data traps we see even smart companies easily fall into. How do you rank on this list?

1. Using Average Value CPA Targets

Cost-Per-Acqusition targets are fertile ground for data issues. For example, are your targets even based on customer value, or are they merely a “seems reasonable” guess? Smart data-centric companies will base target CPAs on actual customer value to ensure that their marketing programs don’t risk over-paying for customer acquisition. However, even smart companies can fall into using a single average CPA target for all their customers. In doing so, they underpay for audiences that provide higher-than-average value customers and overpay for low-value customers. Companies can avoid this by using targets tied to segmented customer values, not averages.

2. Using Last-Click Attribution

The attribution question has long been mired in a false discussion of “who gets credit?” when there is more than one user touch leading to a sale or lead. Some companies still use last-click attribution, often in a mistaken belief that this is somehow a “truer” view of acquisition, or that it just allows them to avoid thinking about attribution at all. Google hasn’t made things easier by offering multiple views of attribution with little guidance on when and where the different options should be used. Here is our take: Avoid last-click attribution at all costs unless you are evaluating retargeting assists. Last-click attribution will severely over-inflate your brand and direct numbers and cloud your ability to see high-value first-mover channels.

3. Not Considering Out-Of-Channel Effects

Everyone looks at their channel-specific numbers, but an astonishingly few companies continually examine their direct and brand channels, looking for influence from other areas. While everyone logically understands that users did not wake up with magical knowledge of a company’s brand, it often feels like that’s the assumption of marketing teams who put on “channel blinders” when evaluating their programs. Smart companies view their data holistically, looking for out-of-channel trends that increase or decrease direct and brand engagement. While only 5% of users in a typical search campaign are likely to bounce over to direct or brand, it is not unusual for a whopping 50%-90% of sales from social media or display campaigns to come through direct or brand traffic.

4. Over-Valuing Metrics Not Tied to Revenue

What is the value of a Like? Most data-driven marketers have moved on from directly equating social media engagement as revenue-related events, but many metrics that don’t correlate well to revenue are still held as sacred cows. Any metric used for campaign optimization should be well understood in how it relates to revenue before it becomes a key KPI. Data-driven marketers with their eyes on the profit prize quickly realize that Time-On-Site, Impression Share, Cost-Per-Click, or other common metrics are not as tightly aligned with profit as they might think when other factors such as volume, customer value, out-of-channel influence, or profit margin are taken into account. Easy rule of thumb: Use post-marketing profit as your marketing KPI.

5. Assuming Traffic Equals Sales

We’re two decades into the digital revolution, and it’s still incredibly common for people to assume that eyeballs equal profit. Back in the days of traditional media the best shot you could make in media buying was the most eyeballs for the lowest cost. That approach doesn’t work in digital because of the competitive auctions, and yet “Let’s get more traffic to this page/product/site” is not at all an uncommon marching order, particularly from executives who don’t understand the auction effects in digital media buying. Smart data-driven marketers know that their job is as much about when NOT to buy traffic as it is in finding the areas of success, and continually evaluating how to increase the quality of an audience by peeling away the “eyeballs” that are not their target audience. This allows them to compete more aggressively in the auctions while protecting the bottom line. Sometimes less really is more.

These are samples of marketing data traps that are very easy to find in almost any campaign. Most of these issues can be avoided through three core practices: 1) By adhering to a holistic financial lens in optimizing the entire marketing program against financial targets; 2) By working backwards through the path that led from advertising to revenue and; 3) By not ignoring revenue that falls outside of the “channel buckets”.

7 Easy Steps to Improve Your Retargeting

Here are seven quick adjustments you can make to take your retargeting program from “Yuck!” to “Yay!” (Listen up all of you who just use default settings and one giant bucket of targeted visitors, and don’t skip the last point below.)

1) Frequency Caps

Overexposure to ads can quickly annoy visitors and result in decreased campaign performance. Limit the number of times a tagged visitor is exposed to your ad. Understand your sales cycle and take into account how frequently you want visitors to see your ad within that time frame.

2) Audience Segmentation

Visitors arrive with different goals and needs. Are they a customer? A prospect? What content have they viewed, and how does that help define their needs? Target messaging in ads to different stages of the funnel. Keep ads relevant to the audience segment.

3) Use One Provider (to start)

Many retargeting providers, such as Google AdWords, AdRoll, Steelhouse, and Perfect Audience have a high level of overlap in their publisher network.  Use one out of the gate to avoid dilution, then add unique publisher networks as your program grows and becomes more sophisticated.  Start with a network that provides a broad reach and good feature support, such as frequency capping.

4) A/B Testing

As with all aspects of digital marketing, retargeting offers a fantastic opportunity to improve your engagement numbers through ad testing.  Ideally, optimize to increased conversions.

 5) Use Targeting Options

Many retargeting networks offer sophisticated add on targeting for geography, context, demographics, or more. If these help you better focus your retargeting spend on the audience that will most likely bring you value, you should be using them.

6) Switch Up Messaging

Many marketers reiterate messaging in their retargeting ads.  But retargeted ads are also an opportunity to say something different.  Perhaps the reason the prospect didn’t convert in the first place was that the key piece of your value proposition for that person was missing in their experience on the site.  A/B testing different ads that have different value propositions is a powerful one-two punch, and a path to success.

7) Evaluate Correctly

Repeat after me: “Retargeting is not a Channel”.  Unlike other media, retargeting only works as an add-on cost that pays for itself by increasing conversion rate.  Without your other channels, retargeting cannot exist.  Yet companies still commonly report on retargeting performance with channel-based metrics, such as a unique cost-per-action.  The right metric is cost-per-assist, and this can only be evaluated in terms of overall cost of acquisition and conversion rate. Thinking clearly about how to evaluate retargeting is key to success, as the increased use of retargeting is quickly increasing the cost and competition in the display networks.

Retargeting is quickly moving through its awkward adolescence as marketers begin to understand user behavior and find tactics that work for them.  Keep trying new ideas and you too will find that retargeting becomes a key piece of your digital marketing program.

Display & Search: 5 Things that Make them Better Together

Marketers engaged in Search often overlook the opportunities in Display advertising, but with total Display ad spend set to surpass Search in 2016, it’s time for advertisers to take a hard look at Display.

The ugly truth is that advertisers who are used to Search often fail at Display.  Let’s chat a bit about the strengths and differences between Search and Display:

1. Immediate Need vs. Education – Search has been the go-to media for direct response campaigns because you can respond to  a clearly expressed need.  When users tell you what they want, it’s easy to tailor the message and the engagement path.  But Search is limited to those that both know what they want and are taking active steps to find it.  Display, on the other hand, offers the opportunity to get beyond the late-stage buyer.  By educating and engaging a broader market, Display can help grow your overall market opportunity.

2. Linear Engagement vs. Cross-Channel – Search-savvy advertisers often fail at Display because they apply the same tools and metrics to Display that work for Search.  The user path is completely different with Display than Search, however.  With Search, it is not uncommon for over 90% of users to click on an ad and then engage.  This linear behavior has lead to the explosion of analytic-driven marketing programs. With Display, though, the numbers may be reversed, with 70-90% of the users that engage doing so without ever clicking on an ad.  Click-to-engagement metrics can lead to Display being undervalued by a huge factor.  Luckily, more advanced approaches to understanding cause and effect are bringing Display back, as advertisers learn to take advantage of how users actually behave.

3. Create Demand – Advertisers that still use last-click attribution love their Brand traffic, but often don’t think about the drivers behind it.  Display engagement often happens through a follow-on Brand search, meaning Display can be a very strong driver of both brand awareness and brand engagement. (Pro-tip: Utilize Display ad messaging in Brand Search ads for seamless engagement.)

4. Accelerated Home-Page Testing – Companies addicted to split testing tend to focus on purpose-specific landing pages, often because targeted Search campaigns can benefit from them. With Display, more focus is placed on the home page (because of the high levels of engagement without a click) creating a bigger audience for testing.  As a result, tests can run faster, creating a conversion win for all marketing programs that drive traffic to the home page.

5. The Display + Search One, Two Punch – With Display campaigns creating demand, and Search campaigns capturing demand, the combined Display + Search approach creates a powerful combination for growth.  As we emerge from the channel-centric world into one that embraces multi-channel, multi-device behavior, this alignment creates tremendous value when executed correctly.

Creating Success in a Complex World

Marketing is about creating success. Why, then, are marketers so often reacting to the numbers, rather than using the numbers to create success? Here are some of the current challenges in numbers-based digital marketing, with an eye to solutions.

Low-Cost Eyeballs vs. High-Value Actions

Historically, media was sold by the eyeball. In a business model based on “reach”, there was little opportunity to optimize on the fly, so traditional media was negotiated only to achieve the lowest cost. This was smart. Giving limited opportunities to improve, you had the best chance of success in being profitable if your media cost was low.

Digital auctions changed all that. Today, going after low-cost media online simply means that you cede an audience to other advertisers who are willing to pay. In AdWords, the advertiser with the best ability to monetize will win. In order to compete, marketers have to highly value actions tightly related to sales and profits, and nothing else. Only then can marketers and advertisers can make intelligent decisions related to value creation, which is the point of marketing.

Action-Centric Advertising is Breaking

While smart marketers moved from eyeballs to actions, fundamental shifts in user behavior were simultaneously breaking the ability to measure actions with total certainty. Cookie-based tracking is falling short in a world of multiple devices per person. Better tracking of multi-touchpoint data and more sophisticated measurement of “influence” is revealing that strict action-based tracking is not wrong, but may be very limited.

The impact on advertisers is immense. Companies that thought they were smartly valuing only conversions are now finding themselves increasing uncompetitive and left to fight it out in the ever-smaller world of desktop-based search.

What Next, Then?

More sophisticated tools are opening the doors to opportunity, while creating new challenges in execution::

1) Holistic measurement. The days of isolated channel behavior, assessment, and budgeting are gone. Cross-channel and cross-device behavior mandates a different view of performance, but one still rooted in value creation. Get used to Venn Diagrams and flow charts. Yes, it is more complex, but it yields better results.

2) Proactive Optimization. Too many companies use their numbers for reporting up, rather than as action points for improvement. Smart companies will isolate key points of the customer story, and will focus on improving them. They will view things that don’t work as opportunities, while recognizing that moving the needle on the things that are working will be faster and take less time.

3) A Segmented View. Marketers need to recognize that behind every average value are the good and bad segments of that audience that can be addressed individually. Sweeping “black and white” decisions based on average performance should be challenged, so as not to throw out the part of that campaign that is working.

The Future

Marketing is evolving and becoming more complex. Media diversity, multi-channel measurement, multi-device behavior, and data overload all contribute to difficulty in crafting a strategy and executing it efficiently. But as difficult as tactical execution is, the core challenge is still in how advertising is viewed. Companies that view every day as a new test and every metric, page, and ad as improvable, and who root everything in the reality of sales and profit, will excel.

Case Study: Locally-Targeted Ads Drive Donation Volume Growth

Client:  Non-profit organization providing support to low-income families seeking home ownership

Overview: The challenge presented was to grow our client’s donation volume and donation value within a limited ad spend budget in an intensely competitive market.  We knew could find gains with a data-driven approach,  and by both maximizing the efficiency of their media buy and selectively delivering ad impressions to audiences where conversion and ROI are highest.

Analysis of a rich historical data set for nationally-targeted campaigns, including ad network data, conversion data from third-party tracking tools, and donation records revealed strong correlations between audience locations and donations. We also found that donation volume increased during periods when our client was actively working in a local area and soon after their work in that area was complete.

To leverage efficiencies observed in different areas of the United States, campaigns were created to more easily optimize around audience performance trends at the local level. Campaigns were also created to target ad delivery to audiences in locations where our client was currently working, or soon would be, and resource needs were greatest. Ad creative focused on the core values of the non-profit and featured the location targeted by each campaign.

Results: In the nine months since implementing local audience targeting and optimization strategies, overall campaign profitability increased by 10%, cost-per-donation improved by 6%, and donation volume increased by 15%.

Case Study: 104% Gross Profit Increase Using Google Shopping / PLAs

Client:  E-commerce retailer that sells seasonal residential products nationwide

Overview:  Our client’s focus is to acquire customers cost-effectively over the spring, summer and fall seasons.  Google’s Product Listing Ad (PLA) program had produced sales for them in the past and once the program shifted to a paid model mid-year, we began managing the campaign on their behalf.  By using a tiered approach in which we targeted products and categories that had historically produced the most sales, we were able to mitigate risk while allowing testing to go on during their slower Fall season.  In addition to the product-specific campaign, we created an ”All Products” PLA campaign, which included all products in their feed at bid prices lower than the product-specific campaign.

Results:  The ”All Products” campaign reached profitability within its first month. PLA monthly sales, as a whole, increased 27% with a 41% higher average order size and 104% higher gross profit per sale than original PLA campaign.  All of this occurred during their “slow” season.

Case Study: 140% Increase in Sales using Retargeting

Client:  Leading provider of labor law compliance materials

Overview: Our client’s goal was to maximize order volume and revenue from a highly-relevant audience at the beginning of the new year, when the demand for updated materials is at its highest.  To help achieve this goal, Working Planet launched retargeting campaigns that would deliver ad impressions to previously non-purchasing site visitors prompting them to return to our client’s site and order updated material. Because measuring lift would be difficult during a seasonal period of higher activity, we utilized tools that allowed us to test the effectiveness of retargeting campaigns on the targeted audience against a control group of previous non-purchasing site visitors. Doing so allowed us to understand the rate at which visitors would return to our client’s site and purchase without ever seeing a retargeting ad.   Banner ads included a strong call-to-action linked to a button, highlighted updated products, and created urgency by emphasizing posting deadlines for employers.

ResultsSales from returning visitors increased by 140% compared to expected sales from returning visitors without ad retargeting. Additionally, the retargeting campaigns contributed 6% more sales and 8% more revenue than would have been generated from all traffic sources without active retargeting campaigns.

Case Study: Social Media and Retargeting Increase Trials 42%

Client:  California employer advocate offering HR law guidance to members

Overview:  During a period of seasonally low user interest, our client’s goal was to attract fresh prospects by promoting a free trial membership to site visitors.   To do so, we supplemented our client’s search marketing efforts with campaigns focused on reaching HR decision-makers where they congregate online by developing display ad campaigns to run on major social media sites, where customization options allowed us to deliver tailored marketing messages to users.  Ad creative featured the benefits of membership and incentivized audiences with a small gift in exchange for the completion of a trial registration.

After a sizable audience had reached the specialized landing page designed to convert traffic to trials, retargeting campaigns were activated to reincentivize visitors who left our client’s site without registering for a free membership trial.

Results:  During the four-month display ad promotion, total membership trials increased by 42% over the previous four months. Membership trials from out-of-channel sources increased by 26% during the first 15 days of display ad activity.